Rising and pernicious US inflation now means that the US is unlikely to see a pivot and a cut in rates before the US elections. The Fed’s favourite inflation measure, the core personal consumption expenditure price index (excluding food and energy) increased 3.4% annual rate from a year ago and was much higher than expected. This was a shock as the Q4/23 rate was up 1.8%. Add to that rising labour costs which rose 1.2% in Q1/24 indicate an uptick in wage pressures. With US personal savings at 3.2% there is little room in family budgets to handle higher costs (food, energy, insurance, electricity, etc.). US Consumer confidence fell to a 21 month low in April. The press conference at the end of today’s Fed meeting will be closely watched to see how hawkish the Fed Chairman has become after his more docile comments during his last press conference. One noted pessimist on inflation is Larry Summers and he sees the serious possibility of a rate hike if the inflation data surprises to the upside in the coming months.

The forecast for the April jobs report out on Friday is for an increase of 243K jobs and the unemployment rate to stay flat. Any surprises here could have meaningful market impact.

Recent Treasury issues have not gone well and bond vigilantes are demanding higher yields to purchase the large amount to be auctioned as the Treasury needs to fund this year’s US$2T deficit and refunding requirements. 2-Year US Treasury yields have risen to over 5% (today 5.03%) from 4.4% in early March. Any misadventure with upcoming issues or inflation data would be a depressant for stock markets even more so than the recent decline. In May the Treasury  needs to raise US$386B – quite an onslaught of new debt.

Foreign investors in Treasuries are selling aggressively and have been buying gold as they reposition themselves away from the exploding US debt bomb. China sold more than US$74B to hold US$849B and this is their lowest ownership since 2009 (data – US Treasury department). Japan remains the largest US creditor with U$1.17T but they are also now selling to stabilize their plunging Yen.

One item not getting much attention is the rise in interest rates is once again harming smaller US banking institutions. Many regional and smaller banks with large Treasury holdings are nearly insolvent, as rates have reached recent highs. US$6B Republic First Bank of Philadelphia was seized by the FDIC last week. If rates spike above 2023’s highs then this could be cause for the market bubble to burst. That would mean the 2-Year Treasury rising over 5.26% (the October 2023 high) .

On the wars front:

• The failed attack by Iran against Israel and Israel’s muted retaliation has lowered the tension in the area and the war premium for crude has receded. Attacks still occur from Hezbollah into northern Israel and Netanyahu still plans to go after Hamas in Rafah. The US is leading a move to get a small hostage release (maybe 30+) and in return they get a temporary ceasefire to provide food aid to the Gaza civilians. It is good to see that the geopolitical tensions are easing.
• US and other NATO aid is moving to help Ukraine but at a glacial rate according to Ukrainian battle front commanders.

Market Update: The general stock market correction is underway. The Dow Jones Industrials Index peaked in late March at 39,900 and has fallen to 37,916 as we write this report. Our target of 36,000, that we have been writing about for some time, is within reach during this quarter. Having cash and underweight the MEME names (FAANG’s and AI stocks) has helped to not lose as much as the major index.

Energy stocks peaked in early April as crude reached its high of US$88/b on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A moderate correction should occur and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to 288 or down by >6% so far. A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from  39% bullish in February 2024 to 91% last week. Over 90% is an overbought reading. Over the last few days of pressure on the sector it has fallen by 8 points to 83%. It  should decline below 20% to give off an oversold level and a BUY window once again.