The US Debt Limit and spending cuts battle to get legislation through the House and Senate and then to President Biden to sign is not making progress. The schedule to get this done is before the Monday Memorial Day holiday, so they need a deal by the end of this week. This does not seem to be in the cards. The drama of the negotiations and rhetoric along the way are disturbing to the bond and stock markets. The Dow Jones Industrial Average broke the support level of 32,900 and is now at 32,804 as Speaker McCarthy spoke to the media today.

Republicans want material cuts in future growth of government spending, with a cap of 1% growth. They want government spending to slow the growth of total US debt (now at >US$31T) or at 130% of US GDP. With interest rates rising the cost of the debt is now larger than the defense budget. The US deficit this year is looking like a shocking US$2T shortfall. This when the US is not fighting Covid or in a recession but is fighting an expensive war in Europe.

The Federal Reserve remains challenged by sectoral forces of economic slowdown and general forces of inflation pressure. While the markets are forecasting that a pause in rate hikes is likely at their next FOMC meeting on June 13-14, the data will be the determining factor of what they do and recent data may require them to make another hike. Some Fed watchers now see that there could be a further 25 BP rise in the Fed Funds rate before the Fed pauses. A pivot to lower rates is not likely unless a severe black swan event occurs.

The US bank crisis is still far from over. Last week US Commercial bank deposits fell US$57B. Since February 22nd US data shows US$590B was withdrawn. The problem is that depositors can withdraw their funds earning less than 15 BP and buy US three month T-bills directly from the Treasury at yields now at 5.34%. This gap cannot close as banks do not have the ability to compete at the high rates. As more people do this switch and say how easy it was to do, we may see a cascade of this switching that will harm more banks (large, regional and small banks).

On the global political and military scene, the Ukrainian major offensive has not yet started. How effective it will be and how long they can move aggressively will tell the tale of which side has more men and more munitions. President Biden has now agreed to give Ukraine F-16 fighters and to train pilots in the US and NATO countries. This will take time and the problem becomes who will service the jets. The US military says it takes 16 man-hours of maintenance for every hour of flying. Will the US send these highly trained personnel to work in Ukraine or in neighboring NATO countries? President Biden upped the ante, by allowing Ukraine to use American weapons against Russian targets in Crimea. The military initiative is bouncing from one side to the other but in the end the one with the best and most weaponry and the manpower to fight is likely to gain the momentum.

The battle for Bakmut seems to be over with the Russian Wagner military victorious. What happens next for offensive action by either Ukraine or Russia is now the key for momentum. Ukraine had a good moment when militants it supports, attacked inside the Russian border but were quickly repelled with high casualties. This was the biggest incursion into Russia by Ukraine forces to date.

We are officially in the bullish camp for the energy sector but overall stock markets are currently rolling over with the most downside pressure from the FAANG tech names. We are waiting for the next oversold condition to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 5% and triggers a Table Pounding BUY signal.