The surprisingly hot US CPI data yesterday drove the Dow down over 520 points to 38,273 and at its worst was down over 700 points, before a late afternoon recovery. The US Treasury 10-Year yield rose to 4.31%, up 44 BP in just over a week, which spooked investors who were betting on 4-6 rate cuts. Now the market is pricing in only three cuts, which was what the Fed had been directing. The March and May meetings for rate cuts are off the table and the first window for the Fed to cut the Fed Funds rate is now June. In June if inflation and wage data weaken then the first cut and the pivot would occur then. I am skeptical the data will support a cut at that time.

So let’s go through the recent economic & political releases of significance. 

• Instead of going down to below 3% and heading to the Fed’s target of 2% the US CPI data for January went up. The core CPI month over month rose 0.4% (4.8% annualized) while the yearly (year over year number) rose 3.9% above the forecast of 3.7%. This pivot in the direction of inflation spooked markets.
• Service costs were the main culprit as wages rose. Services rose 0.8% in the month (the most since April 2022). Motor Insurance rose 20.6%, transportation inflation 9.5%, hospital services 6.7%, Car repairs 6.2% and rent inflation 6.1%. 
• Shoppers are seeing this in the stores. Coca-Cola reported revenue growth as it raised prices but volumes fell in the US by 1%. Kellogg, the cereal maker saw prices rise 7.5% in Q4/23 but volume fell 10.1% as shoppers balked at the price levels.The watchdog group Accountable says the US food industry is engaged in ‘gross profiteering’ at the expense of consumers. 
• Americans are shunning food giants like McDonald’s, KFC, Pizza Hut, Taco Bell, etc. as they start to shun once-affordable menu items. Mcdonald’s had its first quarterly miss in four years. It faced backlash from consumers for raising their prices so high. One location even had the nerve to charge US$18 for a Big Mac combo.
• While the US had great February job numbers the data now available shows that full time job losses in February were 1.4M full time jobs which was offset by more part-time job growth. A large number of the part-time job growth was Federal workers. 
• Wage pressure continues in the UK with pay excluding bonuses rising 6.2%, making the Bank of England’s job tougher. 
• The rising US debt level and interest payments are now spooking bond investors who  want more yield to finance this year’s US$2T deficit and nearly US$20T of financings.  
• The banking crisis is spreading around the world as commercial real estate is ‘marked to market’ and losses are taken. We have seen this in China, the US and now in Germany. The Bundesbank warned that the present value of the banking book was negative for 15 savings banks and 37 credit cooperative banks. The Bundesbank sees the current warning signals for real estate as greater than before the financial crisis. German industrial production fell 1.6% in December worse than expected. 
• President Biden’s gaffes on TV and his recent guilt in mishandling classified US documents was let off the hook due to his age, and the worry that he could not be convicted (too forgetful to prosecute), has again raised the issue of the Justice Departments unequal treatment. It also calls into question why he continues to run. The debates between Biden and Trump will be must-see TV. Who is more cognitively challenged?
• Canada is now seeing nasty job cuts. BCE announced a workforce cut of 9% or 4,800 positions. BCE is doing this restructuring so it can defend its dividend of $3.87 annually ($0.9675 quarterly) providing a yield of 7.7%. 

On the wars front:

• President Zelensky shook up his military, firing his top general and replacing him with one he will push to move from a defensive fighting posture to an offensive one. Two problems: lack of trained manpower and a shortage of munitions. The EU plans to send support but the US may not as it has political gridlock with the Republican party not willing to support Ukraine until Biden does something significant to secure the US southern border. 
• Israel freed two Argentianian hostages but is under pressure to not invade Rafah until it has a safe place for the 1.5 M refugees to go. President Biden is showing more and more irritation with President Netanyahu of Israel over his ignoring US advice. Some military equipment is now being withheld. 
• Shipping in the Red Sea is getting worse as the Houthis attack more civilian shipping and have the gumption to attack warships of the US and UK. The UK warship HMS Diamond was seriously damaged last week. 
• Lebanon is heating up as Hezbollah retaliates for the killing of one of its leaders. They are now firing rockets at Safed. IAF jets have responded. If a ground operation is launched by either party this would be a major escalation in the region.
• The US Senate has approved aid for Ukraine and Israel with a US$95.3B package but it is dead on arrival in the House as the Speaker will not hold a House vote as the package has nothing to solve the migrant crisis on the southern border.

Market Update:  We have expected general stock market weakness in 1H/24 as markets were extremely overbought and downside momentum is picking up. As the general stock market retreats energy stocks, which are high beta, should weaken further and test the lows of early December. 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.