The stock and bond markets rejoiced and prices rose over the last two weeks as muted inflation data gave investors confidence that the end of Fed Funds increases was here. Some bond bulls have even come out with forecasts of Fed rate cuts in early 2024. We do not concur!

Yes, the CPI and PPI fell in October but the majority was due to two items: lower energy and lower used car prices. On energy we see a bit more downside to the US$72-75/b level (today US$77.18/b) but then as we head into 2024 we expect a tightening supply/demand situation to take WTI to >US$90/b in 2H/24, with even some prints over US$100/b. Regarding the used auto side, the recent wage increases won by the UAW mean new car and truck prices will rise next year and this could provide a lift to the used vehicle market as buyers face sticker price shock and budget constraints. 

Some of the noteworthy economic data for the world’s largest economy are:

• Retail Sales in October fell 0.1% compared to a rise of 0.9% in the prior month. Given inflation, unit sales volumes fell over 3%. 
• PPI fell 0.5% month over month thanks to lower gasoline prices and used car prices. Both should reverse in the coming months. Gasoline prices first, once winter demand lifts overall consumption. CPI rose 3.2% in October but core CPI remains high at 4.0%. 
• The US Treasury needs to raise US$2.5T in 2024 of which US$1.8T is to fund the deficit and the rest maturing issues. To fund this gargantuan amount the Treasury is issuing less long term issues and increasing T-Bill issuance. The Treasury plans on using Bills for 22.4% of 2024 funding requirements versus its normal range of 15-20%. This level is a historic high. 
• Moody’s downgraded the outlook for the US to negative from stable due to the downside risk to the US’s fiscal strength and the lack of progress to reign in deficits. 
• US M2 money supply is now contracting at its deepest level this century. It is a negative 5% versus last year and could imply a recession coming in 2024.
• Congress passed a funding bill that moves the needle to Q1/24 and gives time for the House to pass individual appropriation bills. This will avert a government shutdown if the Senate votes for this deal and then President Biden signs it into law. The new Speaker Mike Johnson may have a victory here but he has alienated his right wing Republican members. 
• US office space got another whammy as WeWork filed for bankruptcy and plans to shed most of its lease space that is uneconomic. Landlords will face funding problems and may also file for bankruptcy. 

Overall, this is mixed data, some weaker inflation data but also weakening consumer spending. We expect that earnings will get more attention. If we see more downgrade announcements then the recent stock market price rise will reverse. Part of the recent strength was due to hedge funds that had been shorting the market, reversing their positions and causing price gaps upward, especially for the Magnificent Seven. 

On the two wars fronts:

• The US is cutting back sending military aid to Ukraine as its funding has run out (US$1B left as at November 10th according to the Pentagon). It needs the new appropriation bill President Biden sent to Congress but this has been stalled. Ukraine’s offensive action may soon turn into a winter holding action. 
• Slovakia has stopped sending aid to Ukraine as there is a border skirmish between the two countries and Ukraine has been dumping grain into the Slovakian market harming Slovakia’s farmers. 
• The destruction of the Nord Stream pipeline has been confirmed by the Washington Post as being done by Ukrainian Special Operations Forces with the help of the CIA. The Ukrainian Colonel in charge, Roman Chervinsky has confirmed the operation.
• NATO has confirmed to Ukraine that it cannot meet its commitment to supply one million artillery shells in 2024 due to the deplorable state of the defense industries in their member countries. The US is also emptying its arsenal for both Ukraine and Israel and Biden’s administration is proposing more spending to help the defense industry retool to add more capacity and meet international needs and restock US supplies.

Market Update:  The very narrow market rise over the last few weeks is due to the seven large cap AI stocks being chased by hedge funds that were short the names. The market is overbought and we see the next significant move to be to the downside. Stay patient with cash reserves. 

Once this correction has lowered stock prices and fear has returned to the markets, be ready to buy the bargains that develop. As the general stock market declines, we expect energy prices to back off some  more and the Energy Bullish Percent Index to retreat back to below 10% and ring the bell for the next BUY window. The last BUY signal was in March and we added 14 new ideas to our Action BUY List. Many energy stocks are down from their 2023 highs, and many trade around Proved Developed Producing (PDP) Reserve valuations levels. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports