Labor demand continues to increase as the Tax Cut and Jobs Act, regulation clawback, and march towards fairer trade agreements push intelligent risk takers into the market. Increase in manufacturing points to sustainable growth underpinned by strong consumer confidence. Wages rise while excess manufacturing capacity and automation keep inflation in check. Oil prices, inflated by conflict premium (Iran and Venezuela) and limited pipeline capacity are a pain point for consumers. Look for the conflict premium to reduce as progress with North Korea compels Maduro to improve standing with U.S.; and Khamenei to avoid sanctions scheduled to activate in early August. Construction to expand capacity is happening now with projects completing in 2019 and 2020.
The U.S. will not back down from calling out China’s militarizing of disputed islands compromising the security of international shipping. Look for Freedom of Navigation Exercises to ramp up as U.S. demands the U.N. to enforce the Permanent Court of Arbitration (Hague) finding China’s exclusive claims in the South China Sea to have no historical or legal basis. China stands alone here and will yield.
Structure of the ES Index supports the start of another leg higher. Gold positioned to move significantly lower with Peace coming to the Korean Peninsula. Iraq avoiding sanctions; and Maduro realizing foreign allies will not defend his behavior. Peace is also coming to the Middle East as conditions for avoiding sanctions will ensure Iraq no longer has the capacity/facility to fund terrorism.
Release of the IG Report will force the Aligned Media to disavow sources fueling reporting to the contrary of findings. The Independent Counsel’s investigation will collapse before Labor Day.
The combination of a) sustainable growth evidenced by 13% increase in Q4 earnings over Q3; and 17% increase in Q1 over Q4 b) Atlanta Fed forecasting Q2 GDP of 4.8% with first look coming at the end of July and c) mounting trade and foreign policy success will make it difficult for members of Congress to oppose the Administration’s policies ahead of the Midterms. Look for a pro-Administration Budget to be passed before September 30th (end of fiscal 2018).
Bulls can be expected to return with building energy as the scenarios described above play out while adding to market volatility. Break it down and think it through. You just have to push past the messaging of the Aligned Media to see what is really happening.