Decent US economic growth accompanied by rising inflation (CPI and PPI) is making the pivot to lower rates more difficult for the Fed. The US 10-Year Treasury yield has risen from 4.09% at the beginning of March to 4.41% today. This is the highest yield for this maturity this year. At the beginning of 2024 investors expected six rate cuts but now the expectation is for three cuts. Some Fed members now think there will be only one cut this year and that would be in December after the US election cycle is over. As a result of this more restrictive policy expectation, the US Dollar has strengthened from 102 to over 104. With concerns about inflation and the worry about the upcoming US Presidential election, international Central Banks have been big buyers of Gold. The price has risen from the beginning of March at US$2,050/oz to US$2,316/oz. This is an all-time high in US Dollars. 

The recent attacks by Israel against the Iranian consulate in Damascus Syria killing a leading general (more on this below) and the mistaken drone attack on NGO personnel providing food aid in Gaza, have increased concern that the area may see an escalation in fighting.  Iran could move its proxies to attack (likely Hezbollah from Lebanon) and of greater concern would be if Iran attacks Israel with its accurate long range ballistic missiles. All of Israel is within their reach. 

Crude oil has lifted over US$9/b since mid-March as no hostage deal has been agreed to and Israel has continued to defer advice from its main supporter, the US. President Biden is livid over the deaths of the aid workers and that Israel’s Prime Minister Netanyahu continues to plan an attack in the coming weeks into Rafah in southern Gaza. Biden is annoyed that Israel does not have a plan for the safety of 1.5M Palestinian refugees before the assault commences. We see the war premium for crude at over US$15/b at this time. Could it go higher – YES, if there is a direct war that breaks out with Iran. US$100/b could happen if biological or chemical weapons are fired by Iran into Israel. We sure hope this doesn’t escalate but the evidence and war footings mean hostilities will increase.

Mixed economic data in the US continues with some data showing a sustainable economy with real GDP growth of 3% due to large Federal deficit spending, but also with data showing inflation reversings to the upside. A stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance. 

• One of the crown jewels of the FAANG’s and related names and of AI stocks has been TESLA. The stock rose to US$265 in late 2023 and today is at US$168 per share as it had a year over year decline in EV sales in Q1/24 (to 387K, down from 441K EV sales in Q1/23) which was way worse than market expectations. This stock price decline of 33% in one of the market darlings has brought concerns about the EV transition and the fate of the market darlings which have been the driving force of the market run from late October 2023 to now. This lift for the Dow Jones Industrials has been from 32,300 to 39,900 or a rise of 24%. A correction below 36,000 is now more likely in the coming weeks if earnings results for Q1/24 are disappointing or guidance is negative for high profile companies. 
• The ADP report today showed job growth of 184K, higher than the forecast of 150K new jobs. If Friday’s official US unemployment data shows growth over the 200K expected then US interest rates will move higher and will impact what investors are willing to pay for earnings. 
• The ISM Manufacturing PMI for March rose above the neutral 50 level to 50.3 and was the first reading above 50 since September 2022. This compares to the February reading of 47.8. 
• Investors have moved to all in on this buoyant stock market with equity holdings of financial assets at 48% of all household assets. This level is similar to the highs seen in 2008 and 2022, just before very nasty market declines. Cash levels in household portfolios is at a miniscule 2%, leaving no dry powder to launch a new major market increase. 
• US GDP in Q4/23 rose 3.4% ahead of the 3.2% forecast. In all of 2023 it grew 2.5% ahead of 2022’s 1.9%. The rise can be attributed to the large US$2T of deficit spending. 
• Core PCE (the Fed’s favourite inflation index) rose 0.3% in March and nearing a 4% annualized rate. This is far from the Fed’s 2% target and removes any hope of a near term cut in the Fed Funds rate. The super core inflation rate for Q1/24 came in at a 4.7% annual rate. 
• Consumer confidence continues to decline as inflation pressures persist for food and healthcare. Add in the increase in gasoline at the pump from the recent spike in prices of crude and household budgets are strained. 
• Agricultural products are up 21% annually at this time with  coffee now joining cocoa as the largest price risers. 
• US consumer delinquency rates (90 days or more) in auto loans and credit card debt has risen to the highest level since 2011. 

On the wars front:

• Israel assassinated the top IRGC Quds general leading Iranian backed militias (total 11 casualties) in Lebanon and Syria last week with a well targeted missile attack when he was in the Iranian Consulate in Damascus. This building was between the embassies of Canada and Iran. The general, Brigadier General Mohammad Reza Zahedi has been a target of Israel’s for a long time as he had orchestrated many attacks that have killed large numbers of civilians in Israel. Iran has vowed revenge. What stands out in this attack is that it hit a diplomatic building. Historically, embassies and consulates have not been attacked in war times and thus Israel has crossed an international red line. Will Iran attack Israel and US diplomatic missions around the world? Will Iran orchestrate Hezbollah opening an offensive in the north of Israel? Will they attack Israel directly with their long range ballistic missiles (conventionally or with biological or chemical weapons)? The next few months could be very messy and dangerous. 
• Israeli forces in Gaza had an airstrike that killed seven Gaza aid workers (World Central Kitchen) in a night attack that they say was unintentional. They plan to investigate the incident and see what transpired. President Biden is livid. Most aid provisions have been halted for the safety of the workers but 1M people remain starving in Gaza. Israel has shown willingness to allow aid in but not if it ends up in the hands of Hamas. Removing Hamas while leaving the civilians safe has become a very difficult situation and the more dire the fate of the civilians, the less world support for Israel after the massive Hamas terrorist attack in October.
• On the Ukraine front, drone attacks against Russian energy infrastructure have been their most successful on the battlefield. They have hit four of Russia’s refineries in recent weeks. The latest attack was against the third largest Russian refinery, this one 800 miles into Russia. The refinery, the Taneco refinery of Russian company Taftnet in Tatarstan processed 340,000 b/d. Russia says there was no serious damage and no casualties. In total Ukraine has attacked 14% of total Russian refinery capacity or about 900,000 b/d of product output. Russia says repairs are underway but how long to reopen all the facilities is unknown. 
• Ukraine is running out of munitions despite EU/NATO commitments. Production capacity in the EU is maxed out and is insufficient to meet the daily needs of Ukraine as it fights Russian increased activity and their move to gain more territory. 
• The US and NATO are working with Turkey to source 155mm artillery shells to provide Ukraine with weapons needed to keep Russian offensive forces at bay. Turkey is a key supplier of TNT (trinitrotoluene) crucial in producing the shells. Turkey plans to triple its production and likely will become the US’s largest international seller to the US. This has repercussions for Turkey as they are close to Russia. Providing these shells to kill Russian troops will not sit well with President Putin. 

Market Update:  We remain concerned about the general stock market which is very overbought. When, not if, the general stock market retreats, energy stocks, which are high beta, should weaken. When that happens be ready to buy the bargains that develop across all markets. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.