The stock and bond markets continue to have positive momentum as AI stocks and lower interest rates (on some softer economic data) help both markets. The Bulls see a ‘soft landing’ at worst and the possibility of the Fed and other Central Banks lowering interest rates during 1H/24. Some US economic bulls forecast the Fed may pivot and cut as early as their March meeting. Speculation is that the ECB will lead the rate cut forces as European economies are slowing faster. Today the Bank of Canada kept its key rate at 5% but refused to rule out another rate hike, saying it was still concerned about inflation even as it said prices were generally easing. This was seen as mildly dovish by the market. 

However there is also bullish economic data to hold the Fed, keeping rates at current rates for some time. The Q3/23 reading on the US economy showed a rise of 5.2% way above expectation as consumer and government spending exceeded forecasts. This Friday’s jobs report for November will get close scrutiny and the forecast is for job growth of 180K. The ADP jobs data today came in at 103K new jobs in November compared to 106K job growth in October. Pay increases came in at up 5.6% from the prior year for job-stayers and 8.3% for job-switchers. These large wage increases are problematic for the Fed. The November number includes 30,000 from returning striking auto workers. The next FOMC press conference with Fed Chairman Powell is on Wednesday December 14th. 

Any bad news on inflation or problems in Congress passing bills, could change the positive market dynamic quickly. We are more worried about the next 5,000 points on the downside for the Dow Jones Industrials Index than about missing the next 5,000 points on the upside. We do not see the Fed lowering Fed Funds rates in 1H/24 and maybe not until 2H/24 if the economy (inflation and wage increases) do not slow sufficiently. If energy rises sharply in 2H/24 as we forecast then that adds to the Fed’s dilemma. Caveat Emptor! 

Some of the noteworthy data to consider for the mixed picture for the bulls and the bears are:

• US Consumer spending rose only 0.2% in October, down from the faster pace of 0.7% in September. 
• Core CPI rose 3.5% from a year ago and remains well above the Fed target of 2%.
• Moody’s downgraded China from stable to negative due to the weakening economy and ongoing real estate problems. Chinese cities have some US$11T of off-balance-sheet and much is feared to be at high risk of default unless Beijing comes to the rescue, which the CCP does not want to do. The Chinese stock markets have been very weak this year. 

On the two wars fronts:

• The US has seen increased rocket and drone attacks against US forces in Iraq and Syria. The US navy has shot down multiple drones that were aimed at Israel and US military assets in the region. 
• Iran’s Yemini proxies have attacked shipping around Yeman and the US is now working with allies to escort ships around the Gulf Of Aden.  
• Israel is being attacked again with rockets from Gaza but is under pressure to hold back or control its major offensive in Southern Gaza due to the high civilian death toll. They are now attacking and have surrounded the second largest Gaza city, Khan Younis, in Southern Gaza. Israel has shown the media large quantities of captured missiles and other weapons captured in Northern Gaza from buildings and tunnels close to schools and hospitals. 
• Ukraine’s military now is stalled and battle lines may hold due to winter and the lack of new funds and weaponry from its NATO allies. The US may not be able to come to the rescue with more funds due to the dysfunction in Washington. Current fund allocated are nearly all spent.
• Putin may slow walk his military activities as he awaits who will be in the White House after the November 2024 Presidential election. If Trump wins Putin may see a path to victory as the largesse from the US ends for Ukraine. 

Market Update:  We continue to expect stock market weakness into the year-end. Once this correction has lowered overall stock prices and fear has returned to the markets, be ready to buy the bargains that develop. Energy is now near capitulation as WTI has breached US$70/b. We are watching our indicators for BUY signals which may occur shortly. The last BUY signal for the S&P Energy Bullish Percent Index was in March and we added 14 new ideas to our Action BUY List. With many energy stocks down significantly from their October 2023 highs, and many trading around Proved Developed Producing (PDP) Reserve valuations levels there are some great bargains out there now. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.