Economic data in the US so far is not supportive of the Fed lowering their Fed Funds rate. Today’s CPI report was benign coming in at 3.4% for core, so the Fed is likely to continue its view that it wants to see a few months of slower economic growth and declining price pressure before contemplating a rate cut. In our view no cut should occur before December. 

Economic data of note:

• Core CPI rose 3.4% year over year in May and was down from a forecast of up 3.5%. A slight cooling but as we head into the summer holiday season prices could reverse and go up again. Next inflation releases are PPI and PCE which may not be so benign.
• US Labour costs rose 4.0% in Q1/24 versus 0.4% in Q4/23. Clearly going in the wrong direction.
• Nonfarm Productivity rose only 0.2% in Q1/24 versus 3.2% in Q4/23. Again going in the wrong direction. 
• Nonfarm payrolls for May rose by 229K jobs versus 170K expected and above the 158K jobs in April. Most of this growth was in part time workers. Full time jobs fell. Bottom line again is a hot number for the Fed. The Household survey however showed a weaker number with jobs falling by 408K. 
• Average hourly earnings for May rose 4.1% year-over-year. Another too hot number.
• On the positive side for those wanting lower rates were: Chicago PMI fell to 35.4 (the lowest level since Covid). This is a contraction for the sixth consecutive month. Consumers are feeling a budgetary crunch and are going out to eat less often and are spending less on home improvements (Home Depot/Lowe’s). Many lower middle class and below feel the US is now in recession. 
• Regional and local banks are facing renewal of commercial real estate loans and the value of many of these loans is below the debt as office building values have plummeted. We may see in the coming months more and more of these banks being taken over by the FDIC. Reports show that US$929B of the US$4.7T of outstanding commercial mortgages mature in 2024. 
• Interest rates are coming down in parts of the world where the data is supportive of such a move. Switzerland, Canada and the EU have lowered rates by 25 BP. 
• Canada’s decline was due to a read of GDP of 1.7% down from the prior 2.8% annualized. With a 3.2% increase in population year over year, per capita GDP has contracted by 2.6%, a decline not seen outside of recessions. Canada had job growth of 22,500 in May and the rate ticked up to 6.2% from 6.1%.

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. Note again the wage pressure issue. They also erred by prematurely calling a pivot in December 2023. If inflation persists and goes higher in the coming months Fed voting members may want to raise rates again. So the most likely case is ‘higher for longer’. 

On the wars front:

• Lebanon’s Hezbollah backed by Iran has used precision missiles against Israel’s north. Yesterday they fired 170 of their more accurate rockets at northern and central Israel. These Iranian produced weapons are the most accurate used against Israel. Some have hit Israeli military bases. Israel has retaliated with attacks against Hezbollah in southern Lebanon. 
• Russia is conducting naval operations in the Caribbean Sea to warn the US about allowing Ukraine to use new equipment that is longer range and being fired deep into Russia. It appears the only hold on Ukraine is that they cannot fire these weapons at Moscow.  During this exercise Russia will go to ports in Cuba and Venezuela. Russia is bringing up a warning reminding the US of the Cuban missile crisis of October 1962. By sending ships full of hypersonic weapons to nations hostile to the US, they send notice that they can send weaponry that can hit most of the US. It is a tit for tat of the US providing offensive weapons to nations on the border of Russia. If you can do it, so can we!
• Iran’s elections for a new President may see increased tensions as the likely successor could be more militant and supportive of the IRGC’s desire to be more confrontational with the West. 

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 at some point. 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 happy campers 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 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 a low of 284 today. 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 50% yesterday. 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. 

Our SER issue feature called ‘TOP PICKS NOW’ highlights the best ideas at the time of each SER report. The ideas have worked out very well as not all stocks rise and peak at the same time nor do they bottom at the same time. We have four ideas in the issue out tomorrow. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.