Market Waits For Inflation Reports As DC Increases Spending and Taxes (Report Premium Edition)

Yesterday the US Senate passed the “Inflation Reduction Act,” which really increases government and taxes. The opposite fiscal and government policy we need now!

I don’t like to rant, but I think it important that our readers understand the economic consequences of this insanity. (Scroll down for all the points of it)

Turning to the market…The start of August was more erratic for stocks after a relatively bullish month of July. Retail investors continue to be driven by FOMO (Fear of Mission Out), while many institutional investors are skeptical of the recent market climb, if not bearish.

However, both are very anxious about the rate at which central banks will need to raise interest rates to reclaim control over inflation.

The results earnings season for the year’s first half has finally been overall very positive, which was inevitable. Tech continues to get crushed, and an increasing recession cloud is starting to hit.

S&P 500 SECTORS

US Employment Numbers

The US employment figures on Friday report reported 528,000 jobs were added and as the unemployment rate declined slightly to 3.5% This shows that the labor shortage would not improve, and wages are continuing to grow. However, there is a huge gap between wages and inflation.

I think this makes the Federal Reserve uber HAWKISH and likely to push rate increases until we see a 5% unemployment number. Many have used the number to question if we are in a “recession.”

We know that rising inflation is here, and the Fed is considering it priority number 1 over the stock market and the economy.

Consumers do appear to be tightening their belts and increasing credit card spending. Companies like Netflix will likely be seen as a luxury. AT&T reported that people are now falling behind in paying their phone bills.

Inflation Reduction Act – Increase Gov’t & Taxes Bill

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 actually bloats the size of government 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.

Pelosi Taiwan/China

Meanwhile, Nancy Pelosi’s trip to Taiwan has strained ties between the US and China, eliminating any chance of Washington lowering its tariffs on Beijing, which might have helped curb price hikes. China continues to due battle drills, but there doesn’t appear to be any military action that has caused an exchange of “gun fire.”

Calendar & Key Market Drivers

  • Inflation Reduction Act
  • Wednesday, August 10 – Consumer Price Index (MoM) (July)
  • Thursday, August 11 – Initial Jobless Claims

Inflation is everything this week. The headline estimate for the CPI report for July is anticipated to moderate somewhat from +9.1 percent in June to +8.7 percent Y/Y. On a month-over-month basis, Core CPI is projected to increase by 0.6 percent.

It is anticipated that used car costs and plane fares will also decline over the coming months, relieving some of the strain on American consumers. (We are already seeing prices decline.) With a slowdown from the 1.1 percent pace in June, the producer price index is predicted to rise by just 0.3 percent in July. PPI is anticipated to rise by 0.4 percent month over month, excluding food, energy, and trade services.

In economists’ opinion, the price reports may contribute to discussions about peak inflation. Still, they will also reinforce the widely held belief that the Federal Reserve will increase its target interest rate by 75 basis points at its meeting in September.

The University of Michigan will release its report on the state of American consumers in August on Friday, August 12. The night of August 9 to 10 will see the release of Chinese inflation data for July in other parts of the world.

RATES

Despite cautionary remarks from Fed members who continued to drive home the notion that rate hikes will continue until price fervor fades, US bond yields declined for most of the week.
Nevertheless, until Friday, with the release of the employment figures, when it became clear that the US economy is still overheating, investors opted to concentrate on their increased appetite for risk.

This can indicate further rate increases. Within a short period, the US 10-year rate increased from 2.68 percent to 2.82 percent. The yield curve is still inverted, with shorter maturities like six months, two years, and five years paying more than ten years.

Yields also increased towards the end of the week in Europe. After all, how could it be otherwise on the old continent if the US is battling to combat inflation? The French OAT is at 1.44 percent, the Italian BTPs are at 2.99 percent, and the German Bund is at 0.9 percent.

INFLATION UPDATE

This week, inflation is continuing a downward movement (mainly due to lower energy prices). We are still cautious as the rate is 9.6% YoY.

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

Russian gas supply cuts to Europe have materialized as promised, maintaining Dutch FTT prices at or near €200/MWh. There is an increasing possibility of winter gas shortage on the old continent.

In terms of oil, WTI and Brent both fell by around 10% during the past week, finishing at $88 and $94, respectively. Although OPEC has maintained upbeat predictions for oil demand in the year’s second half, Commerzbank predicts that these predictions may need to be revised due to the more pessimistic outlook.

GOLD & PRECIOUS METALS

Metals Demand for gold, historically considered a haven asset, increased as US Treasury yields and a declining dollar drove prices to $1,775.

Following in the footsteps of gold, silver, palladium, and platinum are snatching up a few bucks.
Despite a 10% increase in production, AngloGold Ashanti, the ninth largest gold producer in the world, saw its profits fall by 18% due to rising costs. In August, many other gold businesses still haven’t disclosed their results.

CRYPTOCURRENCY

At the time of writing, Bitcoin’s price has been ranging around $23,000, practically in equilibrium for the first week of August. The price of bitcoin has not changed despite yesterday’s announcement by Coinbase that it was teaming up with BlackRock to enable customers of the biggest money manager in the world to trade and hold bitcoin directly on its Aladdin platform.

It would appear that rising inflation and strained ties between China and the United States are reducing investors’ desire for riskier investments and, consequently, the flow of money into crypto assets.

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