New York - June 12, 2024 ~ The team at Infrastructure Capital Advisors has completed our new report providing key insights on current market conditions and economic outlook for this month and the coming months.
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JUNE OUTLOOK WEBINAR with SPECIAL GUEST Be sure to register or attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, June 13th at 1:30 pm ET. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Fund Manager, and guest speaker Bryan Perry, high-yield investing expert, will walk you through updated market commentary, economic outlook, and promising markets high-yield performance for June and coming months. Read Bryan Perry's full bio. |
Fed and CPI Update
Fed Update: Fed Meeting Mildily Hawkish as Expected
The SEP was hawkish as it implies only one cut but the statement did acknowledge “modest” progress on inflation. The press conference was neutral as this morning’s low inflation print was hard to ignore. The impact of the SEP and press conference was neutralized by the cool CPI print and there is now broad recognition that the Fed will be behind the curve in recognizing that inflation is contained and that the economy is cooling.
We are maintaining an out of consensus 50% probability of a July rate cut as we believe that the economy is cooling with a slowing housing market and a decelerating labor market. We also expect that global rate cuts will cause the dollar to strengthen and the US economy to slow as it did last quarter. If we get weak 2nd quarter GDP report or a weak labor market report prior to the July meeting, there is likely to be a cut. We do believe that Core PCE will stall out in the 2.6% area unless the flawed owner’s equivalent rent starts to decline. Without a deceleration in the economy we would expect only 1-2 cuts starting in September.
Recent declines in oil prices are bullish for inflation prints in May and June as energy prices bleed into core at approximately a 5% rate. Decline won’t be reflected in the April report this week.
We expect two rate cuts starting in July or Sept. based on decelerating inflation and a softening labor market during the second quarter.
We Project a $2 Trillion Dollar Liquidity Injection from Global Central Banks, which is likely to drive stock and bond prices significantly higher during the summer.
Stock picks are the AI Fab Four plus derivative AI beneficiaries (see below).
CPI Update: CPI Prints Cool Validating Our Bull Case
Both headline and core CPI printed cool driven by a 3.5% decline in energy prices, a 3.6% decline in airline fares (driven by energy prices), and a surprise decline in auto insurance of -.1% vs. an increase of 1.8% last month and up over 20% year over year.
We had projected that inflation would cool off in May and June as the over 15% decline in energy prices not only affects headline inflation but bleeds through to core by approximately 5% as every business consumes energy, most notably airlines. We continue to believe that there is a 50% chance of a cut in July and 50% in September as we do expect inflation to continue to print cool next month. The gradual decline in inflation may still keep the Fed on the sidelines, but we believe that the critical housing sector is slowing with a 9 month supply of new homes for sale vs. a normal level of 6 months and a high of 12 months during the great recession. Also, with other major central banks cutting and the Fed on hold, the dollar is likely to appreciate which should cause net exports to decline which is a drag on reported GDP. Last quarter's anemic GDP growth of 1.3% was driven by a drag from an increase in net exports.
We reiterate our 5,750 target on the S&P with risks to the upside as we get better clarity on the timing of a Fed rate cut.
Summary of June Commentary and Economic Outlook Report:
The US economy is slowing as the hyper cyclical housing sector is rolling over with new housing inventory of 480k now at levels approaching the great financial crisis peak of 580k. There is 9 months of supply vs. an average of 6 months and a GFC peak of 12 months. The most recent housing start data was weak at 1.36MM units down from recent averages above 1.5MM. Weakening growth should precipitate a cut in July or September. (See below for detailed economic outlook).
Recent declines in oil prices are bullish for inflation prints in May and June as energy prices bleed into core at approximately a 5% rate. (See A below for details of Fed Outlook).
We recommend that investors should actually “Not Fight the ECB” instead of following the cliche “Don’t Fight the Fed” in this cycle. ECB cuts are likely to force the hand of other central banks due to currency moves.
Europe represents 30% of the global money supply vs. the US at 23% and China at 20%.
The Fed’s policy framework is overly rigid and needs to be reformed (section C) or it should lose its independence.
Stock Market Outlook:
We reiterate our S&P target of 5,750 Based on AI Boom and Increased Conviction on Global Summer Rate Cuts:
For example, NVDA’s last earnings report validated that the AI boom is sustainable. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.
The AI boom has recently been validated by non-tech CEO’s such as Jamie Dimon and Steve Cohen who indicated wide-spread adoption throughout their firms.
The BOC and ECB rate cuts starts the global wave of rate cuts and will put pressure on other central banks as currency moves reduce the growth of countries slow to cut
We project that there will be a $2 Trillion Injection of Liquidity into the Global Money Supply during 2024:
Most investors do not appreciate that central banks cannot mandate rate cuts and must inject liquidity into the banking system, which normally causes powerful rallies in both stocks and bonds. When the global monetary base (see www.infracapfunds.com) is expanding it is almost always bullish for stock and bond markets.
We forecast that Euro Zone headline inflation will be approaching the ECB’s 2% target by May and that US Core PCE will decline to 2.6% by the end of June.
The Fed has reached its 2% inflation target excluding the flawed owners equivalent rent component of PCE.
We forecast that the Fed will not cut rates until July or September and will cut twice this year.
We forecast that reported Core PCE Y/Y inflation will slowly roll down from the current 2.8% level to 2.6% by June, setting the stage for a potential July cut, if the labor market also continues to soften.
Inflation does not magically re-ignite or become “sticky’. Inflation is caused by excessive monetary stimulus and supply shocks. Current inflation is 1.5% if one utilizes market prices readily attainable from internet rental services.
The recent uptick in inflation was caused by mis-measurement of shelter, an increase in energy prices and ongoing supply shock in the vehicle repair and insurance sector
Fed rate cuts will be aided by a likely surge in the dollar as the ECB cuts but the Fed does not. A strong dollar is very deflationary as commodities are priced in dollars.
Economic & Bond Outlook:
11 out of the last 12 recessions were precipitated by a collapse in the hyper-cyclical housing sector. We have been forecasting for the last two years that the US economy would not go into a recession due to the shortage of housing in the US, but as noted above the housing sector is cooling and the US could enter a mild recession if the Fed does not cut rates this year.
A decline in personal consumption has never caused a US recession. Consumer spending is 95% driven by employment and wages. Consumer spending only declines when the decline in investment spending on housing and other durables leads to mass layoffs, which causes consumers to reduce spending.
The average post WWII recession had over a 10% decline in investment but personal consumption was on average flat.
The Chips Act and other infrastructure spending from the government is very counter cyclical as it supports investment.
The Chips Act is an urgent national security priority as over 90% of advanced chips are produced in Japan.
If the Fed does not cut this year we likely to have a recession as both the housing sector and autos have started to show some softening.
The Fed’s policy framework needs to be reformed.
The Fed’s 2% target has been shown to be too low by academic research and the Core PCE index is highly flawed as the Shelter component lags by 18-24 months by design (6 months lag) and due to inclusion of lease renewals vs. new leases. The Fed should also adopt a nominal wage growth target and an employment target.
Commodity Market Outlook:
Recent Oil Price Weakness Driven By Warm Winter:
We maintain our $75-95 range estimate for oil in 2024 as continued production constraint from OPEC+ and steady demand growth support the price.
Middle east war providing only modest support to the oil market.
We attribute the recent weakness to seasonal/weather factors partially offset by uncertainty created by Houthis attack on Red Sea shipping lanes.
December of 2023 was the warmest in 150 years.
China’s Economy is Way More Resilient Than Perceived which Benefits Commodities:
China is the only major global economy that is loosening monetary policy. China increased its monetary base over $140 billion in September representing a 2.9% increase vs. a $300 billion drop in the Global Monetary Base.
China is projected to grow by 5% this year.
China saves 45% of GDP vs. less than 20% in the US, which results in much higher long-term growth as the critical driver of economic growth is savings and investment.
The property crisis is a concern, but if it starts to generate contagion, the central government is likely to intervene.
The China recovery story is bullish for global commodities and growth.
The utopian vision of an all-electric economy has now completely imploded as average consumers have limited interest in all electric autos, and renewables development falters due to nimby opposition to offshore wind and massive cost over runs. Europe’s failed energy transition is likely to exacerbate a recession and lead to regime change in many countries.
The failed attempt to push an all-electric vision has hurt the environment as there was less focus on hybrid electric cars and using natural gas to supplant coal.
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Infrastructure Capital Advisors, LLC (ICA) is an SEC-registered investment advisor that manages exchange-traded funds (ETFs) and a series of hedge funds. The firm was formed in 2012 and is based in New York City. ICA seeks current income opportunities as a primary objective in most, but not all, of ICA's investing activities.
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Past performance is not indicative of future results.
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