Things you need to know 

• Jay changes the conversation yet again and admits that they ‘might be behind the curve’
• Expect a 50 bps move in May – Or should it be in April?
• Oil – surges 7% – Saudi’s demand more security from the US if we want more oil….
• Wait – don’t we have oil underneath the US? Oh right, not allowed to ask
• 10 and 30 yr. treasuries surge….
• Try the Champagne Chicken Breasts

Say it ain’t so!  This is what you say to express disbelief, disappointment, or grief when you realize something unfortunate that you didn’t expect is about to happen….and so…. I’ll say it again – Say It Ain’t So!!

Stocks sold off yesterday – the S&P falling better than 1% while the Nasdaq fell 1.4% before recovering but still ending lower at end of day – after Jay Powell – while giving a speech titled: “Restoring Price Stability” to the National Association for Business Economics said that:

 ‘Inflation is much too high, and the FED will take the necessary steps to address it’…. saying that further rate rises could be the more aggressive 50 bps instead of the very gentle 25 bps that he promised only last week…. (I’m guessing he must have gotten a look at next month’s CPI report.)

Is someone pulling my chain?  Last week, while acknowledging that it could become an issue (but wasn’t a problem) has suddenly turned into ‘much too high’?   Did he and the others get ‘short’ ahead of the speech?  (Just asking for a friend)  Apparently he must have woken up from his winter slumber (think hibernation) as the season changed from winter to spring over the weekend….he must have suddenly realized that while he was asleep,  he has lost complete control of the process, that inflationary pressures are now at the boiling point and he better do something fast….and to that I say – Jay – you missed the boat…it left the dock 8 months ago….in the summer of 2021…July to be exact….Where were you and your colleagues when it was heating up – showing signs of boiling over? When street analysts, strategists and everyday Americans were making note of the rising prices everywhere we went?

I mean – last week – he continued to tell us that the FED had it under control and that they expected inflation to ‘ebb’ by the summer so that gradual 25 bps increases was appropriate and there was no need to worry – all while so many were calling for a 50 bps increase in March (and another one in May).  And then today – he comes out with this statement?  It’s confusing to the markets, it’s confusing to investors, and it makes them look like they don’t know what’s going on, in fact I am now wondering DO they know what’s going on?
By the end of the day – stocks rebounded off the lows – but still ended the day in the minus column…. the Dow gave up 200 pts or 0.6%, the S&P ended the day down 2 pts (a win), the Nasdaq lost 56 pts or 0.4%, the Russell gave by 20 pts or 0.9% and the Transports lost 130 pts or 0.8%.

Now look – You know me – I had been calling for a 50 bps increase in January since last November / early December…. but alas – he and they thought it appropriate to do nothing in January…. rather they would wait until the March meeting where they chose to go ever so gently…. telling us ‘It’s all good’.  Look – they are WELL behind the curve and only falling further behind the curve with the gentle 25 bps moves.  They need to move now, and they need to move decisively….25 is clearly not doing it and now, I fear, even 50 won’t do it….and while 50 bps will be seen as an improvement – all it does is allow them to fall behind the curve at a slower pace vs. actually making an impact.  

Now my guts says that they should do this, but I suspect they won’t –

They should move one full percentage point NOW – in between FED meetings and send the message that while they may have been  sleeping – they aren’t sleeping any more….And then that brings us to May where I think they should hit us with another full percentage point increase getting us to 2.25% by early summer – a range that they targeted for late winter 2023….this then leaves them June, July, Sept, November & December or 5 more meetings to figure out if that is working…….Remember – 2.25% is not HIGH by longer historical standards, but may appear high by shorter historical standards and current stock valuations are priced against the shorter historical standards and that is why stocks will come under further pressure.

And we haven’t even discussed how aggressive they might be in shrinking their $9 trillion balance sheet – they were hinting at $75 – $100 billion/month – well, make it $100 billion/month and call it a day. For the most part – Jay has done a great job, he navigated through a very difficult time, but the signs were clear – this is not about hindsight that is 20/20, oh no…. So, you have to ask: How come they didn’t see it (or chose not to see it)?
Last week we learned that Producer Prices were up 10% y/y while Consumer prices were up 7.9% y/y – and many analysts  expecting them to continue to surge higher in the months ahead before this slows down at all…and if you think that is going to be in one or two months…think again….And the crisis in Eastern Europe is only exacerbating the pressure….something that higher rates will not solve…..Higher rates will not stop Vlad from sending in the bombs and higher rates will not plant wheat, corn and soybeans in Ukraine – Considered the bread basket of Europe. But that is another story.

Now an ‘off’ meeting move would create angst and in some cases panic (think the algo’s) which would see stocks get hammered for a bit….but once the market stabilizes, then it stabilizes….remember – the market wants CLARITY and after his performance yesterday – all it got was CONFUSION…it got ‘maybe’s, if’s and we’ll see’…so again I say – strap in….make your shopping list, build up your cash balance and get ready to pounce….this conversation is not going away anytime soon….so we either ‘get it over with’ or we suffer death by 1000 cuts….

Under the circumstances – stocks did end lower according to the indexes but did not get smashed at all…. the worst performing sectors were Communications – XLC down 1.2%, Consumer Discretionary – XLY down 1% – recall two sectors that have been the worst performers all year…and were the biggest gainers on Friday when bargain hunters were scouring for opportunities and markets rallied into the weekend. All of the other sectors ended with losses of less than 1%…. with the exception of Energy – XLE which once again was the outperformer rising 3% (now up 37% ytd) on the back of that surge in oil.  Curiously Basic Materials – XLB also ended with a gain of 0.5%.

10 yr. treasuries rose ending the day yielding 2.38% up from 2.15% on Friday as investors piled into the safety trade, Gold up 0.4% to end the day at $1,941/oz – ahead of what could be more volatility if rates begin to rise at a faster pace than what even Jay suggested yesterday.  Oil – surged by 7.5% or $7.90/barrel to end the day at $112.60 on the back of the crisis in Ukraine, the Houthi attacks on a Saudi oil terminal and lower production by OPEC+ than what the markets expected. This morning – we see oil down 80 cts as trader types lock in some gains while it continues to try and find some stability. My sense is that we are in this $100/$120 range in the near term.

Eco data today is about the Richmond FED Manufacturing Index – something that will NOT move the markets no matter what the result…. tomorrow will bring us New Home Sales and they are expected to be up 1.1%…. but keep your eyes on this – because mortgage rates are going up….and housing will come under pressure. 30 yr. treasury yields went from 2.42% on Friday to end the day at 2.51% yesterday. 30 mortgages are 4.5% on conforming and closer to 5% on jumbos. Oh, and don’t forget interest rates on credit cards – already usurious at 14% – 25% they will go even higher too putting even more pressure on many households.

This morning European markets are UP – all rising between 0.5% – 1%.  Investors there appear to be taking Jay’s comments, the ongoing war in Ukraine AND the latest Omicron subvariant in stride.  ECB (European Central Bank) President – Christine Lagarde is due to address the BIS (Bank of Int’l Settlements) Innovation Summit today while the BoE (Bank of England) Governor Andy Bailey will address them tomorrow.

US futures are UP …Dow futures up 125 pts, the S&P’s up 14, the Nasdaq higher by 45 pts and the Russell up by 9 pts. While Jay’s comments were confusing – it is encouraging to see how the market held up yesterday and how futures are reacting today. Hey, maybe I’m wrong and a 50-bps move is the correct move – I guess we’re about to find out.   In all of this confusion there is opportunity – clearly energy has been one and will likely remains so.  Higher rates?  Watch the financials both the XLF and KRE are good proxies. Parts of technology are also attractive…. cybersecurity, AI, and semiconductors are areas I like but remain underweight, I am still overweight the value sector and large mega cap divvy players – again FVD, RDVY and SDVY are interesting ways to incorporate this theme if YOU do not want to pick individual names.

Crypto’s are finding new life……as some of the angst dissipates.  Bitcoin is up 15% in the last week – trading at $42,500 while Ethereum is up 24% at $3,000.

The S&P closed at 4,461 – down 2 pts…after trading as low as 4424 as it hung onto the down trending short term trendline.  4471 is resistance and if we push up and thru then 4550 is the next real challenge. On the downside, I will look for 4285 to be a level that should find some support if we break lower.  It’s all a tangled web we weave…. but is NOT a reason to bail at all.  Stay in the game – just be sure you know what you’re invested in.  Quality over Quantity is the way to play this.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Champagne Chicken Breasts

A classic dish, easy to prepare, presents beautifully on the plate on a bed of sautéed spinach.

Start with skinless pounded thin chicken breasts – dredge in seasoned flour – (S&P). After you have dusted all of the breasts set aside.

 On medium heat melt 3/4 stick of butter and a splash of olive oil in a large sauté pan. When almost sizzling – yet not burning…. add the breasts and sauté for about 4 / 5 mins. At this point – turn the breasts over cook for another 2 mins and then add about 1 1/2 cups of champagne and sauté for about 10 mins more.

Next add 3/4 cup of heavy cream (or lite cream if you must), chopped Italian parsley and a bit of rosemary powder and continue cooking until it thickens up.

While this is cooking – sauté some fresh spinach in garlic and oil and then make a bed on each plate.  When the chicken is done – transfer the breasts to individual plates and top with the champagne cream sauce.

A nice mixed green salad garnished with cherry tomatoes; red onion & cucumber dressed with a champagne vinaigrette finishes off this meal.  Choose a lighter bodied red or even a chilled white to complete the presentation.

Buon Appetito.