Investors await next week's Fed meeting. The markets have already baked in a 25-basis-point interest rate cut. The wild card will be if the Fed cuts even more than that. The latest economic data make that less than a coin toss.

 

The Consumer Price Index for August hit the highest monthly reading since January, with the 12-month inflation rate up from a low of 2.3 percent in April. And yet, the August Producer Price Index showed a 0.1 percent decline, which was below the anticipated 0.3 percent increase.

 

At the same time, initial jobless claims on Thursday surged this week by 27,000, reaching the highest rate since October 2021. In addition, the government's non-farm payroll revisions for the last year resulted in a net loss of 911,000 jobs. The stock market hit new highs on the news. However, the sudden spike in jobless claims was due to Texas floods last month.

 

These opposing trends leave the Federal Reserve Chairman Jerome Powell in a pickle. Does he bend to the will of the president, a growing group of Fed board members,  and the markets that are yammering for several interest rate cuts, or does he hold back and wait for more data? Investor sentiment indicates that inflation is within "acceptable" tolerance levels, while employment is not.

 

Now, unemployment at 4.3 percent remains at what economists consider full employment. The administration's draconian immigration policies could at least partially explain the weakness in the jobs data. But I also recognize that the implementation of artificial intelligence into the workplace is beginning to impact hiring numbers, especially among college-educated job seekers. The risk that job growth may lessen in the months ahead may justify at least one interest rate cut, but no more.

 

My Consumer Price Index inflation forecast proved accurate as annual inflation accelerated to 2.9 percent in August, after holding at 2.7 percent in both June and July. This time around, housing prices were the culprit, while tariffs were not a factor. Further rate cuts would reinforce my expectations that inflation will continue to climb through the end of the year.

 

One wild card in that equation could be the Supreme Court ruling in November on Trump's emergency powers tariff case. A decision against him would likely unravel or delay much of the future price pressure that existing tariffs are creating. I suspect the Fed would want to at least wait until then before moving on to further monetary loosening. Markets appear to be entering a melt-up stage. The Fed is potentially beginning a cutting cycle while the economy is in a moderate growth phase. Nothing could be more bullish if this turns out to be true. We will know more on Wednesday when the Fed meets, and Chairman Jerome Powell gives us the central bank's latest view of both inflation and employment.

 

Worldwide, most equity markets are overbought but could remain that way longer than most can imagine. At this point, my advice is to stay invested, enjoy the ride, but expect a pullback.

 

I will be on vacation next week, so there will be no columns while I am away.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The first week of September saw record highs in the stock market, but bad news on Main Street had investors rethink their investment case. The payroll report had a lot to do with that.

 

The non-farm payrolls report for August, released on Friday morning, was another downside surprise following last month's disappointing report. Employers added just 22,000 jobs for August, far fewer than forecast, while the headline rate of unemployment rose to 4.3 percent.

 

Economists were looking for an already subdued gain of 73,000 new jobs. Even worse, the downward revisions to the employment numbers for past months continued to show additional losses. All in all, over the last three months, the U.S economy created fewer than 8,000 new jobs — the worst record since December 2020.

 

Readers may recall that our president fired the head of the Bureau of Labor Statistics and replaced her with a loyalty pick after last month's data. Will he do it again? Unfortunately, changing personnel cannot conceal the obvious: job growth under Donald Trump is much less than the markets had hoped. I expect that losses will continue in the months ahead.

 

However, I do not expect these labor losses to herald a recession. The fundamental issue behind these numbers is immigration, or lack thereof. I have written in the past that job gains because of our immigration policies have buoyed the job market ever since the pandemic. Trump has reversed these policies at the behest of American voters. And now we must live with the results.

 

The good news is that it has all but cemented expectations that the Federal Reserve Bank will cut interest rates at its Sept. 17 meeting. It is simply a question of how much.

 

Given the choice between staving off further unemployment or reducing inflation, the Fed has opted for preserving jobs, at least for now. And while I continue to believe inflation will rise with the Consumer Price Index for August hitting 2.7 percent, 2.8 percent for September, and by as much as 3.1 percent by the end of the year, markets don't care quite yet. The latest sentiment data has an increasing chance for as many as three rate cuts in total by the end of 2025. I find that doubtful in the face of my inflation expectations.

 

So, what happens if I am right and the expected September rate cut turns out to be a one-and-done move by the Fed? I suspect equity markets are not going to like that one bit. Politically, President Trump will take to the airways with increased vehemence, threatening to bring fire and brimstone down on the Fed, and another uproar will ensue, and then life will go on.

 

But let's not get ahead of ourselves. Stephen Miran, the president's choice to replace Adriana Kugler as Fed governor, testified before the Senate Banking Committee confirmation hearing on Thursday. He passed muster and will likely take a seat on the Fed's board in the weeks ahead.

 

Miran testified during the hearing that he thought "Independence of monetary policy is a critical element for its success." Stocks moved higher on his words, although honestly, what did anyone expect him to say? How would "Senators, I am committed to doing whatever the president decides on interest rates during my four-month tenure on the Fed, while still working for the president," have played out before a political body already nervous over the president's move to pack the Fed with his people?

 

In anticipation, equities moved higher. Suddenly, the prevailing sentiment that the president was being given a bad rap for his words about the Fed changed. He really didn't intend to nominate "yes" men, after all, said the spinners. It's all about the narrative these days, isn’t it.

 

Moving on to "Trump's Tariff Troubles," I suggest you read yesterday's column on the subject. The Court of International Trade had announced last week that the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on our trading partners. This was after a lower court's decision weeks ago that said the same thing. Surprise, surprise, the administration immediately petitioned the Supreme Court to reverse the decision. In any case, the tariffs will still stand until October. After that, it is anyone's guess. However, that is over a month away, and markets have their hands full simply focusing on whether the Fed will cut by 25 or 50 basis points.

 

I envision a scenario where investors will seek further justification next week for the Fed to cut three times this year, with the first cut expected to be 50 basis points, based on the job market numbers. Markets will be anxious awaiting the Consumer Price Index, to be announced on September 11. It should be hotter than expected. If so, based on the CPI data, three cuts "for sure" become two "maybes." By the time the next CPI numbers (also hotter) roll around, it will be clear that inflation is rising, while job growth is slowing. That will put both investors and the Fed in a bind with no good choices.

 

In this environment, it is no wonder that September can be choppy, especially in the next two weeks. I advised readers to expect it, and so far, the month is living up to its reputation.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Fed Chairman Jerome Powell kicked off his speech at the annual Jackson Hole Economic Policy Symposium by admitting that the economic outlook may warrant a change in the Fed's tight money policy. That was Fed speak for it is time to cut interest rates. Markets soared on the news.

 

Economists will debate endlessly whether Powell's sudden turnaround reflects the mounting pressure by the administration on the Fed to cut interest rates or worries that unemployment may be rising. In the meantime, all the main averages were up more than 1.5 percent as I write this.

 

The assumption (more than a 90 percent chance) is that this first-interest rate cut will occur on Sept. 17, the date of the Fed's FOMC meeting. The question most are already asking is how many more cuts are in the cards between that meeting and the end of the year. The market believes two more cuts will occur. The next series of economic data points, released before their next meeting, will determine that.

 

If inflation data comes in higher than expected, then there may be only one cut in September. Readers know that I am expecting hotter inflation readings to continue through the end of the year. Powell seems to be aware of that as well. He said the risks from inflation remain "tilted to the upside." Like me, he also believes that tariff-related inflation pressures "are now clearly visible."

 

Balancing out the inflation risk, however, is the growing unemployment risk. Job risk became a factor after the Bureau of Labor Statistics revealed that unemployment had been ticking up for the last three months. Most analysts believe that the July non-farm payrolls report will also show weakening job growth. The onset of tariffs has made the job of managing monetary policy tricky at best.

 

Suppose that is the case, why cut interest rates at all? Therein lies the rub. Ostensibly, the fear of further job losses. However, the pressure by the Trump administration to remake the Federal Reserve Bank is growing by the day. By September, if Congress votes to approve Stephen Miran, the president's chair of his Council of Economic Advisors, to the Fed, at least three members of the FOMC will be Trump appointees.

 

This week, Trump made it clear that he plans to fire Fed Governor Lisa Cook if she doesn't resign. If so, and he replaces her as well, he will have four out of 12 FOMC members in his pocket. If his efforts fail, it is likely that the president, unless somehow appeased in the short run, will continue to find cause, reasons, or excuses (manufactured or otherwise) to continue his persecution of the remaining Fed members not under his control. From Powell's point of view, the political circumstances might justify a "hawkish" cut next month to alleviate the pressure. Sort of a cut in time to save nine (FOMC members).

 

Before Friday, the S&P 500 was down 2.2 percent this week, while the NASDAQ was lower by 4 percent. That was the second week in four that markets sold off only to bounce back. However, under the hood, those sectors and stocks that have driven the market's gains over the last few weeks were trashed.

 

Investors sold momentum names like Palantir, Tesla, and Nvidia. Other artificial intelligence names took it on the chin, falling by double digits. Some software stocks were down more than 20 percent. Wall Street bears have long argued that valuations in the AI space are absurd. Companies with little to offer investors beyond some mention of AI in their company name or business saw their stock price triple and quadruple in a matter of weeks.

 

Bulls say valuations don't matter. No one knows how AI power will transform the world's economies, but they believe that the AI potential must be measured in megatrillions of dollars. Given that thesis, it was a shock when Sam Altman, the CEO of ChatGPT, one of the movers and shakers behind AI, joined the fray.

 

He said this week that the billions of dollars flowing into the AI arms race risk causing a bubble comparable to the dot-com crash of the early 2000s. "Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes."

 

But Powell's comments on Friday effectively dismissed all these misgivings as investors rushed to buy the dip. Interest rate-sensitive sectors and stocks lead the charge higher. Small-cap stocks, as represented by the Russel 200 index (3.87 percent), outperformed. The dollar fell almost a whole percentage point since expectations of lower U.S. interest rates mean a lower dollar. As such, both gold (plus-1 percent) and silver (plus-2.28 percent) as well as  cryptocurrencies also chalked up some significant wins.

 

The last few weeks of mild corrective actions have now given way to higher stock prices and possibly another attempt to regain former highs. I could see the S&P 500 Index tack on another 75 points or so to 6,550-6,570. Are we out of the woods and on our way to the moon? Not yet, I see another decline once we reach my target sometime in September.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The surprise revisions to the non-farm payroll data last week convinced investors that the Federal Reserve Bank will lower interest rates at its next meeting in September. Beyond that, expectations that at least two more rate cuts are in the offing sent stocks flying.

 

The promise of a potential decline in interest rates outweighed the Aug. 7 implementation of reciprocal tariffs by the Trump administration. Then again, while the headlines appear to show sweeping tariffs levied on dozens of countries, with "no exemptions, no exceptions," the truth is much murkier.

 

The announcement of 100 percent tariffs on semiconductors by the White House on Wednesday came with the caveat that companies that are investing in U.S. manufacturing will be exempted. Precious few global semiconductor companies are not investing in the U.S.

 

Trump also said that India would be hit with an extra 25 percent tariff in addition to the 25 percent tariff it already faces for buying Russian oil. And yet, China, which buys more oil from Russia, gets a free pass. Brazil faces similar 50 percent tariffs, but behind the headlines, the number of exemptions on imported goods is climbing quickly. About 43 percent of Brazil's $42.3 billion exports to the U.S. have already been exempted from these tariffs.

 

A long list of products, including minerals, metals, drugs, aircraft, and food, has been exempted as well, depending on the country or company's ability to make a strong case to the administration negotiators. As such, TACO is alive and well. It is not that obvious unless one is willing to read the fine print (if there is any). 

 

It is the reason why tariffs have become yesterday's news. Investors erroneously believe that Aug. 7 marked the end of the trade war. We have seen the end of the beginning of an ongoing period of trade negotiations. We have entered a different world where the U.S. can and will implement tariffs on any country, at a moment's notice, for any reason real or imagined.

 

However, markets no longer focus on anything more than the next few months. Tariffs are out, earnings were in this week. Corporate profits were better than forecasted. At this point, with so many participants understanding the farce behind earnings beats, all that matters is guidance — what company management says they believe will happen in the next few quarters. Good guidance, good performance, it's that simple. 

 

Readers may wonder why last week's stunning reversal of the employment numbers sent stocks higher. Remember, sometimes Maine Street and Wall Street have different agendas. For those who missed it, June's non-farm payroll data and the massive revisions, which lower the number of jobs gained in the past three months, were seen as a body blow to the economy and job growth. That isn't good for Main Street. Wall Street, however, quickly realized that slower job growth was likely to force the Fed to cut interest rates and shift from its wait-and-see stance. Typically, lower interest rates equal higher stock prices. 

 

The macroeconomic data continues to support my contention that we are in an environment of mild stagflation. As I have written before, gold and other precious metals do well in that background. Usually, a declining dollar accompanies stagflation, as it has been doing so far this year. That also supports gold, silver, and cryptocurrencies. Tariffs on 100-ounce and 1-kilo bars of gold are also playing their part by pushing the price of gold higher. Importing this gold primarily from Switzerland is now subject to 39 percent tariffs.

 

In any case, the bond betting market has now penciled in at least three rate cuts this year (up from two). September's probabilities are above 90 percent. My forecast (if accurate) for a lower July Consumer Price Index reading (released on August 12) would improve those odds.

 

Last week, I advised readers that we were in the middle of a slight pullback. The tech-heavy NASDAQ fell about 4 percent. The S&P 500 declined less than that. This week, we rebounded quickly with the NASDAQ large and in charge. I expect we can move a bit higher into next week, but I doubt the selling is over. Fewer and fewer stocks are participating as we climb higher. Don't be surprised to see some higher volatility in the weeks ahead.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The Aug. 1 tariff deadline has been pushed back again by Donald Trump, but only for a week. The latest non-farm payroll report for July was weaker, and both the May and June numbers were revised downward. Investors were not expecting that news, and stocks tumbled as a result.

 

The U.S. economy added 73,000 jobs, below the expected 104,000. It was enough to move up the unemployment rate to 4.2 percent. At the same time, May's job gains were revised downward from 144,000 to just 19,000 jobs, and June's number came in at only 14,000 job gains versus the initial report of 147,000. It is hard to believe that errors of this magnitude are unintentional.

 

The jobs data made the president's threats of even higher tariffs on numerous countries beginning Aug. 7 that much more worrisome. The week started positively on the trade front. After two days of positive negotiations between China and the U.S. in Stockholm, markets had expected that the Aug. 12 deadline for a resumption of massive tariffs would be extended. However, negotiators made it clear that the final decision would be up to President Trump, who has yet to agree to any extension.

 

A last-minute deal with South Korea produced an agreement for a 15 percent tariff plus a commitment to invest $350 billion in the U.S. Like all the other investment promises, the details and timelines for when and what remain fuzzy. Korean negotiators say that this agreement was a purely verbal understanding with nothing in writing.

 

Trump's Canada, Brazil, and India talks have still not been finalized, and the president continued to insist the Aug. 1 deadline won't be extended beyond Thursday evening. Yet, on Friday morning, the deadline has been extended again by one week. In the case of Mexico, he agreed to extend the completion of a trade deal by another 90 days.

 

As for corporate earnings this week, both Microsoft and Meta beat second-quarter earnings handily on Wednesday. They predicted a rosy future ahead for their efforts in cloud computing and AI. Meta shot up more than 11 percent as they beat earnings estimates and guidance for the year. Microsoft jumped almost 5 percent and joined Nvidia in a league of their own as both companies' market capitalization surpassed $4 trillion each. Neither Amazon nor Apple fared as well, and all these stocks gave back some of their gains on Friday.

 

By Thursday, the seven largest U.S. companies had reached a combined market value of $20 trillion. Earnings for these companies have generated nearly $600 billion and now account for 30 percent (up from 8 percent 15 years ago) of the S&P 500's combined $2 trillion in net income.

 

The seven are trading for 33.7 times current earnings and have pushed the overall price/earnings of the market to more than 27 times. The capital expenditures at Microsoft, Apple, Amazon, Google, Meta, and Broadcom are consuming a significant portion of the cash they earn from operations, and Nvidia is a major beneficiary for some of that capex.

 

Overall earnings continue to beat estimates and have, until now, added fuel to the rally that seemingly never ends. Until Friday, investors have been looking past the tariff issues, expecting another TACO at the last moment. It helped that in the previous two weeks; the U.S. negotiated a framework for deals in both the European Union and Japan.

 

In addition, they have seen little evidence year to date that tariffs have had any impact on economic growth, and neither has the Fed. This week's FOMC meeting was a disappointment because the Fed is still insisting that it needs more data before deciding to cut interest rates. The jobs report for June may change that perception, at least when it comes to employment.

 

Over in the bond market, the U.S. Treasury announced it will need to raise $1 trillion in the three months to September just to keep the government running. That does not account for any of the new spending authorized by Congress in their recent tax and spending bill. Much of that fund raising will be targeted at bills and notes between a week and a year while keeping the size of its auctions of longer-dated bonds steady.

 

This is a continuation of the strategy under former U.S. Secretary of the Treasury Janet Yellen. It is a ploy to keep long-term interest rates from shooting through the roof as Congress spends more and more. The risk is that each time that this short-term debt matures, which is at least once a year, it must be replaced by new debt issued at current interest rates. If rates were to rise, the Treasuries debt burden would rise with it.

 

I urge readers to read my recent two-part series  on fiscal dominance, "What is really behind the move to replace Jerome Powell." It will give you an understanding of why it is critical that the administration has more control over the Federal Reserve Bank.  

 

As readers know, I have been warning that stocks were overextended and in need of a timeout. We began that pullback this week. Before it is over, we could see a 4-5 percent decline in the S&P 500. I expect a few more days of volatility as investors figure out how serious Trump's new tariff deadline could be.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.