There is good news on the inflation front to keep Central Banks from further raising interest rates but also some data that is not supportive of this optimistic view. Next Wednesday, the betting line is that the Fed raises its key rate by 25 BP and waits for more data before their September meeting to decide if another increase is warranted. 

On the positive side:

• CPI and PPI data for June was very muted and heading downward to the 2% Central Bank targets.
• US Retail Sales rose a modest 0.2% versus the 0.5% in the prior month as consumers have less discretionary spending capability. 
• US Industrial Production fell 0.5% versus the forecast of a flat number. 
• Economic growth in China fell to 0.8% in Q2/23 versus a 2.2% rise in Q1/23. 
• The US dollar has fallen from 103 to below 100 helping on the import inflation front.

On the Negative side:

• Crude prices which were a big part of the inflation declines are now reversing. WTI is up US$10/b from a month ago. Electricity prices have risen double digits as electricity providers are running flat out and brownouts are expected during key usage periods from 4PM to 9PM. 
• Food inflation is persisting as drought conditions means smaller and less fulfilling crops. Animal herds are shrinking which mean higher meat prices in coming months.
• Russia has cut off Ukraine grain exports.They want equal treatment access to the Swift system to settle transactions as given to Ukraine. The UN is working to get one of the Russian agricultural banks to be given this access so that Russia can also sell its wheat and corn and fertilizers to buyers in the Middle East. Wheat prices have lifted as a result of the cut-off of Ukraine supplies. 
• Record high and sweltering temperatures around the world are impacting water supplies and many cities may have to ration water and prices could rise materially for imported water. 
• Pay increases will make things harder for Central Banks given the tight labour conditions. United Airlines just settled for 40% over four years. Delta Airlines settled for 34% over three years. UPS plans on striking August 1st (they carry 5% of the US GDP each day). BC port workers rejected the recent four year offer and want a two year deal with more concessions. 
• Grasshoppers are becoming a plague across the US and are eating up everything in their path. The USS Citrus crop may shrink in half as a citrus greening disease impacts the trees. Orange Juice prices will be much higher this fall. 

The war in Ukraine is not seeing progress for the Ukrainians. It seems a stalemate is occurring as both sides wait for more munitions, weapons and trained soldiers to use the new NATO or Iranian equipment. The death toll on both sides has been horrendous. President Zelensky himself acknowledges that the counter-offensive had to be paused. He blames it on NATO delaying the weapons and munitions promised which have not yet arrived. The speed and consumption is so rapid that NATO supply chains can’t replace usage fast enough. The problem is that NATO inventory of 155MM shells are nearly out of stock. That is why President Biden authorized cluster bombs (which most of NATO are opposed to) as he does not have much left in inventory to send to Ukraine to keep them fighting. He has sent over US$41B of materials and is now out of Javelins, 155MM artillery rounds, tank rounds and Stingers and the US ability to replace and produce precision munitions is a multi-year solution that needs Congress to approve multi-year contracts. 

One high profile NATO announcement was that Ukraine would receive F-16s in the future. None have yet been delivered as it takes over six months to train a fighter pilot on this new equipment. So seeing Ukrainians fighting Russia for the control of their air appears to be a 2024 plan. 

What I am perplexed about is why wasn’t Ukraine fully stocked up with sufficient munitions before the counter-offensive started. Were they set up to fail? Did the west expect the Wagner group to topple Putin? With half the fighting season over for 2023 (before wet weather starts in October) this year’s offensive by Ukraine looks to have churned through weapons, munitions and manpower with minimal to show for it. If NATO gets tired of supporting a stalemate, Ukraine may be forced to the bargaining table which will mean the territory captured by Russia may stay with Russia. 

Market Movement:  Today the bulls are elevating stock prices. The Dow is up 0.5% or 187 Points to 35,139. 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 84, pushing near a record high. 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.