There is some good news on the inflation front to keep Central Banks from raising interest rates but also some data that is not supportive of this end of rate hikes optimistic view. Today the FOMC unanimously voted to raise its key rate by 25 BP (to 5.25 – 5.50%) to a 22-year high and plans to wait for more data before their September meeting to decide if another rate increase is warranted. The ECB is expected to raise its official rate tomorrow as inflation in Europe is  much more persistent. 

On the positive side supporting an end to the US rate hike cycle are the following:

• CPI and PPI data for June was very muted and heading downward to the 2% Central Bank targets.
• The US Leading Economic Indicator (LEI) declined 0.7% in June following a 0.6% decline in May. 
• US regional banks continue to be under asset shrinkage problems and this forces the banks to lessen lending. US$78B was withdrawn from commercial banks a week ago. The FDIC has warned some banks against misreporting their uninsured deposits. Those involved are seeing more deposit outflows. 

On the Negative side indicating that the rate rise cycle may not be over are the following:

• Crude prices which were a big part of the inflation declines are now reversing. WTI is up US$6/b from the average of Q2/23 @ US$73.99/b. This will add to CPI and PPI pressure in the coming months.
• 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 persistent as drought conditions mean smaller and less nutritious crops. Animal herds are shrinking on higher feed costs and lack of water, which mean higher meat prices in coming months.
• India which exports 40% of global rice supplies has placed restrictions on rice exports. The country is worried about lower crops this year due to heavy monsoon rains in the north and deficit rain in other parts of the country. Panic buying has arrived around the world. In the US a bag of 9 kg of rice previously sold for US$15-16, and now sells for US$46.99 for the bag. 
• The UPS contract agreement has significant wage increases for the Teamsters Union members (340,000 members). The rank and file start voting on the tentative deal on August 3rd. 
• The entertainment industry strikes have spread and the issues of AI and its usage has made this a strike that could last quite a while and be very costly. 
• With a win by the Teamsters at UPS, their next big battle is with the auto manufacturers and they could strike in September if a lucrative deal is not agreed to. Here it is about EV’s needing less employees to build cars and what happens to laid off workers. 

The war in Ukraine is seeing more escalations as one side hits the other and this is now spreading to daily drone attacks on Moscow by Ukraine and the Black Sea Ukrainian ports being blockaded and attacked by Russia. 

Some recent events: 

• Russia did not renew the export agreement allowing Ukraine to ship grain to the third world sponsored by the UN. Russia agreed to the prior deal as it  was supposed to allow Russia to sell its grains around the world. One of its agricultural banks was to have access to the SWIFT financial system and western shipping and insurance as well; which did not occur. They now have warned all shipping heading into Ukrainian ports that they will be considered ‘potential carriers of military cargo’ and stopped or sunk. Wheat prices rocketed higher by 15% in the days thereafter.
• Ukraine in retaliation sent drones to attack military depots of munitions and fuel in Russian held Crimea as well as the main bridge from Crimea to the mainland.
• Russia then attacked the ports in Odessa and destroyed infrastructure and grain elevators and storage facilities. 
• Ukraine then sent drones attacking multiple sites around Moscow. The attacks were targeted against military facilities and the oligarch living areas.
• Russia then moved to attack ports in southern Ukraine near the Romanian border (Reni)  and destroyed grain and grain infrastructure. What is of importance is that they used new modified Iranian drones called Doritos that have more accuracy and range. 
• Russia, to move its grain is giving cheap prices to its African buyers which keep them supporting the Russian regime and gaining the food that they need. Other buyers are getting grain but shipping routes have had to be changed. 

The move by Russia against ports near NATO member Romania is considered by Europe as a ‘massive escalation’ by Moscow. The only way now for Ukraine to ship grain is via truck and rail to nearby countries and see if they can move it to UN storage facilities and to countries getting this aid. 

Market Movement:  Overall earnings expectations for the S&P 500 are a decline of 7% in earnings comparisons from last year. 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. 

The start of energy earnings results shows weaker comparisons. Last year in Q2/22 WTI prices averaged US$108.57/b and this year US$73.99/b or down by 32%. Chevron reported cash flow down 12.5% to US$6.3B from US$7.2B in Q2/22. Today (the first Canadian E & P Company to report) Crescent Point Energy (CPG-T) reported cash flow from operations down 12.7% from a year ago. Net Income at CPG fell 38% from $331.5M to $205.4M. So comparison this quarter may prove disappointing especially for natural gas focused entities. Last year AECO traded at C$6.27/mcf and this year at C$2.35/mcf, or down by 63%.

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 was recently 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.