Market Bounces Up. Pull Back or Recovery? (Report Premium Edition)

S&P 500 8-15

Last week’s big market news was a decline in the Consumer Price Index (CPI) number. This report elicited a bull rally from retail investors. This caused many sectors to turn bullish short term.

For many retail investors, this rally is confirmation that the market has reached support. However, most institutional investors are bracing for another big drop. I tend to personally think we see a larger drop coming later this year or 2023 when holiday shopping numbers come in short of expectations.

The other news was the passage of the “Inflation Reduction Act,” which will increase government spending, job losses, and taxes. The end result is more INFLATION. I will talk more about this later in the Report.

Turning back to the CPI, Many economic observers also hailed the recent (CPI) reading’s reduction due to lowering food and fuel prices. 

The producer pricing index (PPI) confirmed the decline a day later —the first since January 2020— and suggested inflation had peaked.

However, I want to point out that a declining CPI does not indicate that prices are decreasing overall; instead, it simply suggests that they are rising slightly less quickly currently (+8.5% over the past year as opposed to +9.1% in June).

Real inflation is greater than CPI; even though I use CPI as a baseline since it is poorly estimated, it is calculated the same way each month.

I follow Truflation to get an idea of what is really happening. Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

Officials from the Federal Reserve are becoming more circumspect, stating that before declaring the top, they need to observe many months of declining CPI.

This is another way for the Fed to say they are more Hawkish and likely to continue raising rates.

Lastly, any other geopolitical unrest, such as a worsening of the Russia-Ukraine conflict, a crisis or war between the United States and China, or a Middle East war between Israel and Iran, could bring about supply shocks that raise inflation once more.

Fed Continues to Denies “Recession”

Officials continue to share the same forecast on the recession from the Fed. No Fed official that I have seen has confirmed the US recession. However, most regional Fed bank presidents see modest economic growth, and some are prepared for a quickening of the recession. 

For example, Neal Kashkari, president of the Minneapolis Federal Reserve Bank, stated last week that “we may be in a recession in the near future.” I find it challenging to comprehend the opposition to calling the current recession into question. The economy has shrunk for two consecutive quarters even as the Fed raises interest rates.

CBO Warns About Debt & Inflation Reduction Act

According to a Congressional Budget Office (CBO) assessment, over the next 30 years, the federal deficit as a percentage of GDP will average 7.3 percent.

Debt will make it harder for the economy to grow at a healthy rate, possibly resulting in decades of relatively slow growth. Additionally, higher debt levels will result in higher foreign interest payments and a greater risk of a financial collapse.

The US Senate passed the “Inflation Reduction Act” on Sunday, and it is going to the House. In typical government fashion, the name is very misleading as it bloats the government’s size and increases taxes.

Americans For Tax Reform did a great breakdown of the bill and its effects. Here are the key points:

  • $6.5 Billion Natural Gas Tax Which Will Increase Household Energy Bills
  • $12 Billion Crude Oil Tax Which Will Increase Household Costs
  • $1.2 Billion Coal Tax Which Will Increase Household Energy Bills
  • Corporate Income Tax Hike on U.S. Businesses Which Will Be Passed on to Households
  • $124 Billion Stock Tax Which Will Hit Your Nest Egg — 401(k)s, IRAs, and Pension Plans
  • 95% Federal Excise Tax on American Pharmaceutical Manufacturers
  • $52 Billion Income Tax Hike on Mid-Sized & Family Businesses
  • Add 87K IRS Agents, Supersizing the IRS to Increase Audits – $124 Billion

One of the key things is that it hurts many investors and people when they retire. Under the new law, Democrats will levy a new federal excise tax on Americans who decide to sell shares of stock back to a firm, lowering household savings’ value. Any person with a 401(k), IRA, or pension plan will have their retirement funds harmed by tax increases and restrictions on company buybacks.

The bottom line is that it will result in more government spending, which will lead to more inflation. This is exactly the opposite of the title of the bill. There may be some opportunities for investors to buy stocks related to this bill in green energy.

Socialist Price-Fixing Bill

The Democratic Socialists of America-backed Rep. Jamaal Bowman (D-NY) plans to submit the “Emergency Price Stabilization Act,” which would grant the White House authority to regulate the cost of rent and housing, food, energy, and healthcare. 

The federal government must “move swiftly to safeguard individuals from the kinds of price shocks we are witnessing now,” according to Bowman, who also claims that the measure is a first step in “redesigning our economy.” “We need a revolution in governance,” Bowman continued.

China Taiwan Tensions

While Taiwan’s president rejected Beijing’s proposal for reunification, China’s military continued to surround Taiwan. China declared that its training exercises were complete but did not signal the end of its war games in the waters off Taiwan.

According to state-run media in China, the People’s Liberation Army (PLA) would continue its routine patrols of the Taiwanese territory. The presence of the PLA around Taiwan has not decreased, according to Taiwan’s President Tsai Ing-wen, who also stated that Taiwan rejects China’s offer of the “one nation, two systems” concept put forth by Beijing in a white paper released on Wednesday.

Key Events & Calendar

  • Tuesday, August 16 – Building Permits (July)
  • Wednesday, August 17 – Retail Sales (MoM) (July)
  • Fed Notes
  • China Taiwan Tensions

The United States July retail sales are anticipated to be the primary figure for the upcoming week on Wednesday. Next week, the NAHB Housing Market Index, building permits, housing starts, and existing home sales will all be released, along with Home Depot (HD) and Lowe’s (LOW) earnings reports, giving investors a clear picture of the state of the housing market (LOW).

Along with a significant investor event for FuboTV, the calendar also features earnings reports from Target (TGT), Walmart (WMT), and Macy’s (M) (NYSE: FUBO).

The intensive scrutiny of inflation and interest rates will remain in the meantime. The minutes of the most recent meeting are expected to be released by the Federal Reserve on August 17. While the deceleration in inflation adds some intrigue, the expectation is that they will only confirm that members are committed to fighting inflation and that the subsequent negative surprise in CPI may not change the plan.

RATES

The yield curve is still inverted in the US, where the yield for a 10-year maturity is 2.85 percent, while the yield for a 2-year maturity is 3.19 percent. The market stands by its stance because it thinks the short-term economic situation is worsening and contesting that is challenging.

The market is now expecting the Fed to raise interest rates by 50 basis points in September as opposed to 75 basis points, as a result of the July inflation data showing less robust growth than anticipated. The European Central Bank (ECB) is attempting to prevent an increase in the spread between Italian (3.03%) and German (0.95%) debt. The French OAT has a 10-year average growth rate of 1.52%.

COMMODITIES

OIL

It was another bearish week for oil. Brent and WTI oil cost approximately USD 95 and USD 92 per barrel, respectively. This is a decrease of almost $30 from the June highs. The International Energy Agency (IEA) notes that an increase in supply is mostly to blame for this reduction.

As of July, we are at our greatest levels since January 2020, right before the epidemic began, with an average of 100.5 million barrels per day. But the demand is still high, considering that the EPA increased its 2022 forecast by 380,000 barrels per day to 99.7 mb/d.

GOLD & PRECIOUS METALS

The precious metals market is still in the mood for recovery. Gold purchasers are gaining from the resurgence of risk appetite evident in recent sessions. The price of gold is about USD 1793. Since the most recent Fed rate increase, industrial metals have also made some progress. Lead is trading at USD 328, copper is rising to USD 572, and aluminum is staying put at USD 156.

CRYPTOCURRENCY

Following the US stock indices, bitcoin has risen further this week and is currently trading at around $24,000. On the other hand, Ether has increased six times since the start of August, clearly beating the market leader. Thus, after breaking through the psychological barrier of $1,000 in June, ETH is again trading around the $1,900 mark. An abnormal development can be explained mainly by a recent resurgence in investor interest in risky assets.

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