Debt Ceiling Negotiations Cause Treasury Bond Yields To Meander Higher

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

Big Day for Energy

The energy disruption from the massive forest fires in Alberta is reducing North America supply and helping the other energy stocks that I continue to hold. A collapse in gasoline inventories before the Memorial Day weekend bodes well for our refining stocks, since the U.S. will soon be approaching peak summer demand.

Finally, OPEC+ meets on June 4th and further production cuts may be announced. As a result, I am planning on continuing to hold many energy companies, especially those that posted strong quarterly results and positive guidance.

June 4th will be a big day for energy stocks and I suspect another OPEC+ cut on top of the recent 1.6 million per day cut could be in store. The summer months represent peak demand for U.S. energy consumption, so I expect crude oil prices will rise.

I should add that due to the big budget fight in Washington D.C., the Strategic Petroleum Reserve (SPR) will not start being significantly refilled until the fall or later, despite the SPR being depleted by over 200 million barrels by the Biden Administration last year.

Interestingly, the Energy Department’s first attempt to refill the Strategic Petroleum Reserve or SPR failed after its ask of companies to sell crude oil between $67 to $72 per barrel failed. The Energy Department is now making another attempt by trying to buy up to three million barrels of cheaper, sour crude.

Contracts are expected to be awarded on June 9th for the second attempt to buy crude oil for the SPR. The bottom line is if the Energy Department will not pay market prices to refill the SPR, it is not expected to receive many proposals.

The Debt Ceiling Concerns

The political football that is known as the debt ceiling negotiations has temporally caused Treasury bond yields to meander higher. Treasury Secretary Janet Yellen in a Bloomberg interview said “If Congress fails to do that (lift the deficit ceiling), it really impairs our credit rating.

We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients.” Naturally, what Secretary Yellen said will not happen, since it is political suicide, so the fears over the deficit ceiling are unfounded, since in the end, the deficit ceiling will be lifted after each side strives to score their political points.

There is going to be good inflation news in June and especially July, since the Consumer Price Index (CPI) rose 0.9% in May 2022 and 1.2% in June 2022. In other words, the annual rate of the CPI will be collapsing below 4% in June and 3% in July when the CPI is announced, since big monthly inflation surges will be eliminated for the annual CPI calculations.

The lower CPI will help market rates move lower and increase the gossip when the Fed will cut key interest rates. Officially, the Fed wants the annual rate of inflation to decline to its target of a 2% annual pace based on the Personal Consumption Expenditure (PCE) index before cutting key interest rates. I am now in the camp that the Fed will start to cut key interest rates at the December Federal Open Market Committee (FOMC) meeting.

Minneapolis Fed President Neel Kashkari told The Wall Street Journal that he could support holding key interest rates steady at the upcoming June FOMC meeting. Specifically, in an WSJ interview last Friday, Kashkari said “I’m open to the idea that we can move a little bit more slowly from here.”

Then in his best Fed double speak, Kashkari said “I would object to any kind of declaration that we’re done. If the committee (FOMC) chooses to skip a meeting because we want to get more information, I could make the argument why that makes sense.”

The statement from Kashkari that I like was when he told the WSJ that “There’s no question an inverted yield curve doesn’t work for banks. It violates the fundamentals of their business models, and the longer it’s inverted, the more challenging the environment becomes for banks.”

I have been a big fan of Kashkari ever since he helped implement the TARP program. After working for the Treasury Department, Kashkari moved to Truckee, California to write a book and then ran as the Republican candidate for governor of California back in 2014.

So with the deficit ceiling concerns and worries about the Fed’s interest rate hikes waning, you may be wondering what is Wall Street going to stress about next?

The recent banking woes in banks that catered to wealthy customers that moved their money if they were not paid a good yield on deposits, just demonstrates that the Fed has to un-invert the Treasury yield curve as Neel Kashkari emphasized, since an inverted yield curve naturally stresses the banking system. So be on the lookout for the Treasury yield curve getting flatter and eventually un-inverting in the upcoming months.

AI Spark

There is a tremendous amount of cash on the sidelines, which could pour into the stock market spark a major market rally, as soon as there is a “spark.”

In the meantime, the oasis this year have been the seven largest technology stocks, namely Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA), now account for approximately 25% of the capitalization weighting in the S&P 500 and 55% of the NASDAQ 100.

Three of these seven giant stocks are benefitting from all the AI buzz, lead by Nvidia. Another up and coming AI stock is Super Micro Computer, which is helping to make cloud computing smarter as AI is invading the cloud computing space.

There is a growing war between Google and Microsoft over using AI search engines. The rumbling that Samsung devices may switch to Microsoft’s Bing from Google for search is fueling the escalating AI war.

Since AI and technology stocks currently lead the overall stock market, the “spark” that triggers the cash pouring in from the sidelines could be any positive news emerging from the technology sector, such as Apple’s new iPhone announcement in September.

However, that spark could also come from the Fed commenting that inflation is cooling. Since 2024 is a Presidential election year, the Fed does not want to be part of the economic debate, so key interest rates cuts will be forthcoming later this year and in early 2024.

It is important to realize that there is going to be wave after wave of positive news on inflation, interest rates and economic growth that will be coaxing investors back into the stock market. The leadership of the stock market will undoubtably change in the upcoming months, although some of the seven giant technology stocks, like Nvidia, are expected to continue prosper from the AI boom.

Summertime Cheer

Now that summertime has arrived, it is time for most investors to cheer up. The velocity of money typically picks up in the summer as folks get out and about more. The retail sales report showed that consumer spending at bars and restaurants rose 0.6% in April and 9.4% in the past year.

Additionally, Walmart (NYSE:WMT)’s same-store sales rose an impressive 7.4% in the first quarter. Groceries and on-line sales are helping to boost Walmart’s results. Walmart provided positive guidance for 2023, so optimism for consumer spending is rising. Another example is that the Atlanta Fed recently raised its second quarter GDP estimate to a 2.9% annual pace.

Overall, investors will soon have less to worry about. Whatever investors have been fearing is fizzling fast. It is not healthy to be perpetually bearish, like Jeremey Grantham and Nouriel Roubini, who the financial media regularly turn to get “crash” and “super bubble” comments.

Currently, our large capitalization growth stocks are trading at only 15.7 times median forecasted 2023 earnings, despite being characterized by 180.7% annual earnings growth. The good news is earnings momentum is expected to pick up in for the rest of 2023 due to positive company and analyst guidance. I strongly advise all investors to cheer up and be happy, since growth stocks are poised to prosper.

Coffee Beans: I Scream for Ice Cream

A Japanese ice cream company assembled some of the world’s rarest ingredients to create an ice cream flavor that costs $6,696 per serving. The pricey treat’s ingredients include a rare white truffle grown in Alba, Italy, that costs about $6,905 per pound. It also includes Parmigiano Reggiano and sake lees. Source: UPI. See the full story here.