US CPI inflation fell back and this lifted stock markets worldwide as hope lifted that the Federal Reserve may hold off lifting its Fed Funds rate on Wednesday July 26th by the prior expectation of a rise of 25 BP.  The US Dollar has retreated to 100.60 today, near the early May low. The Dollar low for 2023 was 100.42 in mid-April. Yields on the two-year Treasury have backed off from 4.99% a week ago to 4.73% today as optimism about Fed restraint spreads. 

The CPI month over month came in at 0.2% and the year over year for June at 3.0%. The latter decreased from 4.0% in May. Core CPI (ex food and energy) remained too high at 4.8% but was down from 5.3% in May. The big help in getting a lower number was the decline in gasoline prices which fell 26.5% from last year. Also helping was a decline in used car prices (down 5.2% from June 2022). Rents however continued to lift inflation costs to consumers as they rose 0.5% in the month (6% annual rate).

While this CPI report indicates that inflation pressure is subsiding, the Fed’s concern about a tight labour market and rising wage inflation has not gone away. The June jobs report of last week showed average hourly earnings rose 4.4% year over year and was above the 4.2% forecast. The unemployment rate fell to 3.6% from 3.7% in May. 

Tomorrow the PPI comes out and that should also show declining inflation pressures. We still expect the Fed to increase rates at the end of this month as more strikes are planned by workers to get large wage increases (UPS – 340K drivers, UAW against the big three US automakers, etc.).  In Canada the west coast port workers strike (7,400 employees) is already slowing exports of potash, coal and arriving items like cars from Asia. These supply chain issues can drag on for a while and add to costs and embed itself into higher inflation. Nutrien announced today that it has halted production at its Cory potash mine in Saskatchewan as there was no more storage capacity at the Neptune bulk terminal at the Vancouver port. The Bank of Canada raised its key rate by 25 BP to 5.00%, its highest rate in 22 years as it fights to get core inflation below 2%.  

The 2% goal of the Fed is something that may take into the end of the decade to occur unless some significant black swan event knocks the economies hard. 

Today the bulls are elevating stock prices. The Dow is up 0.8% or 270 Points to 34,531, with the broader averages up even more. The end of this week starts Q2/23 earnings season and we will be watching comparisons and guidance. Overall expectations are for the S&P 500 to see a decline of 7% in earnings comparisons. If results come in worse or guidance is negative then the markets exuberance will reverse. Stock multiples are high and if earnings are heading downward there can be a material near term correction. We are watching the 33,600 level for the Dow, which if breached would complete a topping formation for the Dow. A close below 32,600 would set up the waterfall decline phase to below 30,000. Stay patient with cash reserves and be ready to BUY at the next low risk entry point. Don’t get trapped by this current euphoria. 

Get ready to be buyers once this expected correction has lowered stock prices and fear has returned to the markets. The CNN Fear & Greed Index today is at an extreme greed reading of 80. Bottoms usually occur below a 20 reading. 

We are waiting for the stock market to get oversold again to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 10% and triggers the next BUY signal.