The Republican National Convention is on this week and all of Trump’s former Presidential opponents are singing kumbaya and circling the wagons to get a fully united party to win the Presidency, the Senate and a large majority in the House. His surviving an assassination attempt last week has added to his messianic support. A very big task for the divided Democratic party, still not sure if they want President Biden or VP Harris to lead the ticket, hangs over their chances in November. Any further stumbles by Biden before the Democrats August convention would further disrupt their chances of retaining the White House and keeping the Senate.

Mixed economic data continues to sway North American markets as each data piece is scrutinized for signs of the health of the economies. What is holding the US economy up is the government deficit and defense spending. 

Data of note:

• Home Insurance rates in the US have been rising at a 12-14% rate this year adding to the pressure on household budgets. Many with renewing mortgages cannot afford their homes now and the number of unsold homes has picked up sharply and price pressure is now being seen in many markets.
• Auto and credit card delinquencies are on the rise. Nearly 9% of credit card balances are now in delinquency, and 8% of auto loans. Banks are raising their provisions for losses in their Q2/24 reports. 
• JPMorgan took a US$3.1B credit loss provision in Q2/24, a 62% increase over Q1/24. 
• Total Household debt (according to the Federal Reserve of New York is now up to US$17.7T. This is an all time record.
• There was mixed inflation data last week. The June CPI came in with a moderation at 3% (versus 3.3% in May) indicating a slowdown in the data. Right away markets started pricing in three Fed Funds cuts in 2024 with the first expected in September. The next day core PPI came in at 0.4% hotter than the 0.2% expected and the issue of three cuts became questionable. We still expect only one cut and that after the US election is over. The most concerning part of the PPI report was that Services prices rose 0.6% or at an annual rate of 7.2%. This was the sharpest rise for services in 15 months. 
• The US Michigan Consumer Expectation survey for July came in at 67.2 down from the 69.8 expected (May 69.6). It was 79.4 in March showing the quick deterioration of consumer confidence.
• On a positive note, the report on Industrial Production showed a rise of 0.6% above the 0.3% forecast. 
• China is facing a banking crisis with 40 rural banks vanishing in just one week. The biggest was the Jiangxi Bank. 
• High end retailers are feeling the pain of lower consumer spending with Burberry dropping 16% over the last week as they issued a profit warning and replaced their CEO.

Summarizing – We surmise that the Fed is boxed in by their 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 swings higher again 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 are in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year. 

On the wars front:

• China is holding joint military exercises with Russia offshore of Alaska in international waters. They are also doing the same around the Philippines as they expand their military working relationship.
• Chinese troops in Belarus training with local forces has infuriated NATO European members who fear having to fight China in Europe. China providing support to Russia is already worrisome to them as the new drones China is providing Russia have been very effective. 
• Israel continues to go after Hamas leadership and Palestinian civilians have seen rising casualties. Biden wants to get a peace deal done before the US election but some of the deal aspects are abhorrent to Israel. 

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.

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. It recovered thereafter to US$84/b on optimism of a strong summer driving season. We continue to believe that the weekly EIA storage data will be key to near term crude price action. US inventory growth on a repeated basis should drive WTI near term below US$80/b and likely lower in coming months.  

We remain concerned that the general market and the energy sector are vulnerable. The market is getting narrower and narrower as the AI stocks continue to take markets higher but the underlying market is deteriorating. A correction may be in its early stages. The S&P/TSX Energy Index peaked at 308 in week two of April and is at 288 today.

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