Economic data in the US so far is not supportive of the Fed lowering their Fed Funds rate the three times previously assumed. The FOMC meeting last week concluded with officials penciling in just one rate cut. This one cut is likely after the election. In order to cut rates in December they will need to see more good data on inflation. The good news (down 0.2%) on the PPI was mostly due to a 4.8% cut in the price of crude and gasoline. With the recent 10% recovery in WTI to >US$82/b (from US$72.48/b at the beginning of June) the good inflation reports will be reversed in upcoming data. 

Economic data of note:

• University of Michigan Consumer Sentiment plunged to 62.5 from 69.6. This is the lowest level in two years. 
• US Retail Sales fell 0.1% versus a forecast of a rise of 0.2%. 
• The Philadelphia Fed Manufacturing Index fell from 4.5 to 1.3 and below the forecast of 4.8. 
• Europe upped tariffs on imports of Chinese EV’s to protect their local EV makers. 
• Russia has become the largest supplier of natural gas to Europe once again as some countries flaunt EU sanctions. The US is now the second largest supplier. Norway has lost market share due to its pipeline rupture. 
• China’s economy is weakening as housing and manufacturing disappoint. Manufacturing is down due to the tariff threat and actions in Europe. Chinese consumers are also not spending as their net worth declines as real estate plummets. This will impact energy consumption.

Summarizing – The Fed is boxed in by their own policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. They also erred by prematurely calling a pivot in December 2023. If inflation persists and goes higher in the coming months, some FOMC voting members have indicated that they may want to raise rates. So the most likely case is ‘higher for longer’. Stagflation is here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We may be in the early stage of a consumer recession. Not a good situation during an election year. 

On the wars front:

• Lebanon’s Hezbollah backed by Iran has used more precision missiles against Israel’s north. It is now gearing up for war with Israel. The Hezbollah Red Beret Brigade have been training for an invasion of northern Israel. 
• Hezbollah has shown drone footage of the Israeli naval base in Haifa showing Israel’s naval vessels and sensitive bases and factories. A warning to Israel of its capabilities. 
• Israel has prepared for war with Hezbollah with operational plans to knock out their facilities and weaponry in southern Lebanon. 
• The US wants to restrain Israel from invading Lebanon and widening the war in the Middle East. Netanyahu has blasted President Biden and the White House has lashed back. The US has restricted sending 2,000 pound bunker busting bombs out of concern Israel is using them in Rafah and endangering civilians. This break in the relationship with Israel is due to Netanyahu not listening to US advice any longer but rather is meeting the more aggressive stance of his right wing coalition. 
• The US forecasted today that there may only be 50 living hostages in Gaza. 
• A coal carrier was sunk by the Houthis in the Bab-el-Mandeb chokepoint increasing navigation risk. This continues to lift insurance costs for shippers. 
• Cairo has agreed to contribute troops to an Arab force to secure parts of Gaza after Israeli troops are removed. These troops would remain until a new Palestinian government was set up to take over. 
• Russian naval ships have left Cuba and are now in Venezuela. This waving of the flag has infuriated the US. Hypersonic missiles were on the submarine and other ships in the small fleet. Russia is warning the US that they are still a factor and should not be ignored. 
• China has seen more naval challenges in the Spratly Islands against the Philippine navy. More saber rattling in this contested area that may have significant energy reserves. 
• Ukraine will be getting more air defense missiles from the US to protect Kiev and Kharkiv. They are redirecting this aid from other allied countries. Such armaments are in high demand yet the manufacturing of these weapons is difficult due to supply chain and limits to the western defense industrial base. 

Market Update:  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies.  The military industrial complex and areas where weaponry is built are strong economic centers these days.

China has throttled back crude imports as weak domestic demand and refinery margin pressure persists. So if the two largest energy consuming nations see weaker end user demand then crude prices could breach US$75/b once again and we may even see prices breach US$70/b in the coming weeks. This should set up the next low risk BUY window for energy stocks. 

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$72.48/b in early June as no escalation occurred and global inventories grew. We continue to believe that the weekly EIA storage data will be key to the near term price action. If we see a breach of US$70/b then we should get another low risk BUY signal, the first since early February 2024. At that low risk entry point we added some new BUY recommendations. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. 

We now see the general market and the energy sector as vulnerable. A correction is in its early stages and we expect the next low risk BUY signal to occur during Q4/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to 279 today (down five points from last week). Our downside target is below 240. The overbought condition in April can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91%. Recent weakness has pulled this Index down to 45% yesterday (down five points from the prior week). Over 90% is an overbought reading. It should decline below 20% to give off an oversold level and a BUY window once again. We show a chart of this in our SER report coming out tomorrow for subscribers. 

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