The FOMC meeting today came out with a hawkish view even though they decided to skip an increase this time. The majority of voting members see two or more increases this year so it now puts July’s meeting as the next window for a rate rise in the Fed Funds rate. Most see higher inflation this year and don’t see unemployment rising as much as previous views. The stock market is taking this on the chin and is down 325 points on the Dow, now at 33,887. In the coming days we shall see how the markets react to the press conference and the hawkish stance announced today.

The Fed remains concerned about core CPI inflation which remains over 5% (5.3% year over year for May) which is over double the 2% target. While the month over month was muted, the concern is that the benefit was due to lower gas prices (down 19.7% from last year when the invasion of Ukraine was front and center). We see this as temporary and that we may soon see much higher inflation from energy. One other problem is rental increases which were up 8.7% from the year earlier. The PPI released today showed core up 0.2% in May and is being ignored because of the temporary energy benefit.

The spring counter-offensive by Ukraine has started but appears to have stalled with only a few small towns recaptured. Both sides have seen large amounts of munitions used and the winner may be the one with the best logistics and supply trains. Ukraine advanced on four fronts to the south and southeast and has gained less than five kilometers of ground according to recent reports. Use of much of the new weaponry provided by NATO has helped with this advance but the Russians have destroyed some of the German Leopard tanks and US Bradley fighting vehicles in the recent skirmishes. Russia has been bragging about this success in defeating the latest NATO weaponry with videos on State TV showing columns of the German tanks being blown up. The numbers are less than when Ukraine knocked out large numbers of Russian tanks during the invasion but the loss of large numbers of new equipment makes the chance of a major offensive success less likely. If this drags on for a few more months with no large gains for Ukraine on the ground it is likely that NATO will push for a diplomatic solution which President Zelensky may find appalling to accept.

China continues to show the US that it can play offense as well as they can. Since 2019 China has had a spy base in Cuba but has now agreed to spend billions of dollars to expand its intelligence gathering. This enhanced signaling facility could scoop up electronic communications (emails, phone calls and satellite transmissions) throughout the southeast of the US where many military bases are located. The US initially denied the base’s existence but were more forthcoming after multiple media reports of China’s espionage signet facility. The US has had multiple eavesdropping facilities near China and now China has increased its own monitoring against the US.

In the meantime more aggressive flights over Taiwan and closer warship maneuvers in the straits shows China is testing Taiwan’s responses. Concern is growing that the US being so involved militarily in Ukraine may give President Xi the confidence that now may be the time to move against Taiwan and put in place an economic blockade.

We are in the bullish camp for this energy super cycle but are concerned about too much speculation in the tech sector, particularly the AI stocks. We suspect a general stock market correction will unfold in the near term which will take the Dow down >10% to below 30,000 (now 33,887. We had expected the market to have broken down already but this has been delayed by the debt ceiling agreement and the recent love affair with AI related stocks. A breach and close below 32,600 for the Dow should start the downside pressure for all the indices. This decline could extend into late July versus our prior expectation of late June. One interesting supportive contrarian indicator is that the CNN Fear & Greed Indicator is today at an Extreme Greed level of 81. One year ago we had a 20 reading which was one of Extreme Fear. This pendulum swings back and forth and now with this extreme optimistic level the next move should concur with our expectation of the Dow Jones Industrials Index falling below 30,000.

Get ready to be buyers on this dip/correction. We are waiting for the next overall stock market to get oversold again 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. 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.