Political Madness, Fed Talk & Job Report (Report Premium Edition)

Every week, I provide try to keep the Report short with only the essential information you need to make the best choice for your customers and portfolios, but this madness needs to be exposed.

The Biden administration, together with Treasury Secretary Janet Yellen, is boldly trying to deceive the American people about the state of the economy. Which is not only wrong but dangerous.

Please don’t take this as a pass on the Republicans because they engage in a similar spin, but this is much more extreme.

Last year, the Biden administration claimed “inflation” was just temporary. However, most people that follow the markets knew it was a lie!

Many of you will remember that we warned readers in June about it and to start moving from bonds and brace for a market drop.

Fast forward several months, everyone is astonished that inflation has reached a 40-year high!

Last week the Biden administration attempted to redefine the term “recession” in a fruitless effort to deceive the public. I don’t know if they think we are stupid or desperate to show competence.

All this reminds me of the Great Inflation that happened from 1965–1982. Due to inflation in the middle of the 1960s, the Johnson administration could not reduce expenditure on the Great Society or the Vietnam War. As a result, the Fed was unable to control inflation, and Americans saw a number of inflationary increases that changed America.

Turning to the markets…Last week the financial markets continued to rise due to encouraging speeches and FOMO (Fear of Missing Out).

In terms of corporate results, this was one of the busiest weeks. Earnings exceeded expectations, particularly for the stock market’s biggest names, which significantly impact indices. The prognosis is still optimistic despite the pressure on margins, which should continue in the upcoming quarter. (possible crash on Holiday spending reports?)

The second quarter GDP, a Fed rate rise, and the most recent inflation data for the US and the Eurozone were just a few macroeconomic events that took place last week.

If we were to recall just one thing, it would be that investors welcomed the slowdown in the US economy because they regarded it as a justification for the Fed to postpone further interest rate increases.

In other words, the bad news is good news.

Key Market Drivers

  • Inflation Reduction Act
  • Earnings
  • Fed Talk
  • Tuesday, August 2 – JOLTs Job Openings (Jun)
  • Friday, August 5 – Unemployment Rate (Jul)

Several US job market figures will be released during the first week of August. The JOLTS Job Openings Survey, Weekly Jobless Claims, and June Employment Data are due on Tuesday (Friday). There will also be two US activity indicators, the ISM Manufacturing (Monday) and the ISM Services (Thursday), as well as the Bank of England’s decision on monetary policy (Wednesday).

Charles Evans, James Bullard, and Loretta Mester, the presidents of the three Federal Reserve Banks, will deliver addresses as the Fed speakers break out of their pre-FOMC silence to discuss this development and other economic news. There is disagreement on the trajectory with an eye toward the upcoming FOMC meeting, but it is generally agreed that more rate hikes will be required to battle inflation.

BP (BP), Airbnb (ABNB), CVS Health (CVS), Starbucks (SBUX), Caterpillar (CAT), and Block are among the companies sharing their earnings (SQ). The shareholder meeting for Tesla (TSLA) will take place the following week at a pivotal time for the electric vehicle manufacturer. The trial surrounding the Department of Justice’s attempt to halt UnitedHealth’s (UNH) agreement with Change Healthcare (CHNG) will begin soon, which could have significant ramifications for the healthcare industry.

S&P 500 SECTORS

Tip: Use this section to know various sectors’ performance and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

Fed Rates & Takeaway

At its meeting last week, the Federal Reserve decided to raise interest rates by 0.75 percent, marking the fourth increase this year. Though they cited low unemployment and job growth as indicative of a strong economy, the Fed warned that expenditure and output indicators had weakened. (Read Our Full Article Here)

Inflation appears to be going down, but the Fed’s target is unknown. We tend to think the Fed wants below 6% for short (this year) and below 3% (2 years). According to Truflation.com, the current YoY rate is 9.85%, down from 10.5% on June 29.

Turning to the economy, the Fed is most likely looking at health based on several factors. However, I think investors should look at two reports: the GDP (Gross Domestic Product) and unemployment. The Fed will likely not react to negative GDP numbers until inflation drops dramatically.

However, I think the unemployment rate is one of the key numbers that will cause the Fed to change its pace or strategy. Specifically, a sudden jump above 5% unemployment will cause the Fed to become dovish and halt rate increases.

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The stock market has most likely priced in a slight recession and companies are bracing for the worse. However, the market will likely experience significant bull runs in the coming months when there is negative economic data because it increased the chances of a dovish Fed. 

Rates Could Fall, According to Blackrock

The largest asset manager in the world, BlackRock ($9T AUM), argues this is improbable in a message to clients this week. Their experts share the view of other companies that the Fed will start lowering rates in 2023, which would indicate a recession. BlackRock also sees more volatility. They have the following two investing themes:

The era of constant economic expansion and minimal inflation has ended. “In the United States, we anticipate erratic growth and ongoing inflation… The downside [risk] is that the Fed stays on its current path the next year and drives down demand to make up for low [production] capacity.

In other words, if the Fed cannot control inflation via raising interest rates and maintaining a strong currency (which makes imports feel cheaper relative to other currencies), then there is a danger that they may become too strict in an effort to suppress demand.

BlackRock also claims that the markets have not yet adjusted to the reality of poor results, as I have already indicated, and that is why they anticipate further declines in US stocks.

Recession

This morning, the Bureau of Economic Analysis stated that Q2 GDP was down 0.9%. The United States has entered a recession, or two consecutive quarters of economic growth, following Q1’s -1.6 percent. The Fed is promoting the “technical recession” narrative, suggesting that this isn’t a “real recession,” similar to the White House’s picture last week. And the Fed is still considering the option of engineering a smooth landing.

Because of supply shortages and decreased production capacity, Americans will have to deal with inflation. Supply is becoming more scarce due to the lockdowns in China, the Ukraine conflict, and the American workforce’s absence following the epidemic.

More government spending under the Inflation Reduction Act

The Senate came to an agreement yesterday on the so-called “Inflation Reduction Act,” which will increase federal spending by $433 billion. The Act “provides tax credits and investments for energy projects,” according to a White House statement, which “will create thousands of new jobs and help cut energy prices in the future.” This Act will “lower carbon emissions by nearly 40% by 2030,” according to a Democratic information sheet.

The Act also provides tax credits ranging from $4,500 to $7,500 for buying electric vehicles and tax breaks for buying green products like rooftop solar panels, ecologically friendly heat pumps, and water heaters. The Act also provides $60 billion to low-income and underrepresented groups that have been harmed by environmental contamination.

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.

RATES

US bond rates have decreased as a result of the second straight quarter of the US economy’s (moderate) downturn. The 10-year rate dropped back to 2.7 percent as investors’ expectations of a swift Fed rate rise were modestly reduced. Given the slowing in the economy at work, shorter maturities (6 months, 2 years, and 5 years) continue to pay more than the 10-year. The 10-year rates for the German Bund, the French OAT, and Italy are all 0.89 percent in Europe.

INFLATION UPDATE

This week, inflation is again slightly down but hasn’t reversed the trend. In past rising interest rate environments, rising inflation came in waves. It will also become a major political issue going into elections as Americans pay more for everything.

We follow Truflation. 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.

COMMODITIES

OIL

The oil markets are still tense as they wait for the OPEC+ meeting on August 3 to update their predictions of the world’s supply. In the upcoming months, Russian output should fall, but this loss should be partially offset by Libya’s growth, whose supply should climb from 800,000 to 1.2 million barrels per day. This week in Europe, gas prices rose to new heights. TTF, the Dutch benchmark, surged to over EUR 200/MWh at the peak of the week. Russia keeps prices under pressure by limiting shipments through Nord Stream 1.

GOLD & PRECIOUS METALS

A lower dollar this week helped the price of metals rise. Global supply should be impacted by weak pricing. Some mining firms have issued warnings that they cannot continue to run some unprofitable operations, including Freeport-McMoRan. The supply/demand balance ought to be tightened as a result. Copper is selling for USD 7,700 per tonne on the LME. Gold recovered in the precious metals market by 2.20 percent to reach USD 1760.

CRYPTOCURRENCY

Cryptoassets have continued to rise in tandem with US stock market indices for the second week in a row. At the time of writing, bitcoin is back above $23,400, and ether is above $1,650. Notably, ether has outpaced bitcoin from the start of July, achieving +56 percent, its greatest monthly return since January 2021, in contrast to the market leader’s +18 percent. The macroeconomic environment, however, does not encourage a decisive return of capital to riskier assets, so caution is still the rule of the day.

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