The big news over the weekend was the narrow miss in the assassination attempt on former President (and current leading candidate) Donald J. Trump. Americans of all political persuasions are thankful for his survival, and we grieve the death of an audience member, but when injured candidate Trump raised his fist in defiance against the assassin, that gave new energy to the Republican Convention this week. Prior to last Saturday’s assassination attempt, President Biden and many in the media have repeatedly tried to demonize the “MAGA” Trump crowd, but voters tend to concentrate on the issues, so due to: (1) a lack of upward mobility for many young people, (2) a proposed military draft for men and women up to age 26, (3) open border concerns, and (4) a desire for more law and order, it appears that Donald Trump might be re-elected in a landslide, even if Joe Biden is replaced by a younger, more energetic candidate. Fed Chairman Jerome Powell has been waffling for months about cutting interest rates, and candidate Trump has been very critical of the Fed for the damage they have inflicted on interest rate-sensitive sectors of the U.S. economy. Furthermore, riding a new populist wave, Trump is also expected to reignite the call for lower interest rates, if elected. He also plans to unleash the full U.S. energy sector from Day One and throughout the first 90 days of any new Trump Administration.
Here are the most important market news items and what this news means:
- The big economic news this week will be Tuesday’s June retail sales report. If retail sales stall for the third month in a row, the probability of an early Fed rate cut on July 31st will increase. Chicago Fed President Austan Goolsbee said that the June inflation statistics make him more confident that price pressures are easing in a way that supports the Fed lowering key interest rates. Specifically, Goolsbee said, “You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me.” Goolsbee asserted that unemployment is drifting higher, new hiring is cooling, and delinquencies on certain consumer debts are rising, which implies that the Fed should signal that key interest rate cuts will be forthcoming.
- The culprit for the June Producer Price Index (PPI) increase was trade services as well as wholesale service costs that rose 0.6%. The good news is that wholesale goods prices declined -0.2% in June after plunging -1.4% in May. A strong U.S. dollar continues to put downward pressure on wholesale goods prices, so that is a good sign. The other good sign is that Treasury bond yields did not rise in the wake of the PPI report, so a Fed rate cut on September 18th is likely. However, if I were running the Fed, I would cut key interest rates at the July 31st Federal Open Market Committee (FOMC) meeting.
- The Personal Consumption Expenditure (PCE) announcement later this month is expected to be very positive in the wake of a first monthly decline for the Consumer Price Index (CPI) since May 2020. Furthermore, the sticky point regarding consumer inflation, namely shelter costs based on owners’ equivalent rent, rose only 0.2% in June, which is the smallest monthly increase since 2021. Also, PCE weights owners’ equivalent rent lower than the CPI, so there is no doubt that the June PCE will be favorable and cause the Fed to issue a dovish FOMC statement on July 31st.
- The Russell 2000 surged 3.57% last Thursday and 1.09% on Friday in the wake of the profit-taking in leading stocks this year, so all of a sudden there has been a “seismic shift” as the breadth and power of the overall stock market improves. Some market pundits believe that this seismic shift in the wake of a negative CPI announcement is anticipating multiple Fed key interest rate cuts, which will help to boost domestic stocks, versus the big multi-international stocks that dominate the S&P 500. These impending Fed interest rate cuts will essentially respect the “turbo boost” that the stock market and U.S. economy need.
- Interestingly, at the Goodwood Festival of Speed, which is Britain’s big car enthusiast event, BYD has a very large display, so there is no doubt that BYD is invading Europe, regardless of tariffs. China’s National Bureau of Statistics reported that exports surged 8.6% in June, while imports declined 2.3%. The Chinese trade surplus was a whopping $99.1 billion in June. There is no doubt that China is producing more EVs, batteries, and solar panels than its domestic market can absorb, so China has to continue to dump its goods on the rest of the world, and even tariffs show no sign of slowing booming Chinese exports.
In summary, Wall Street hates uncertainty and, fortunately, everything is now much more certain, with a likely Trump win. We also know that the Fed will be following other major central banks if it starts cutting key interest rates no later than September 18th. Under Trump, current and future U.S. tax cuts are also expected to improve the “velocity of money,” which is how fast money is changing hands. The U.S. dollar has also been amazingly strong since the U.S. is expected to lead a worldwide economic recovery.
