Things you need to know 

• Jay hints at something more than 50 bps, ECB jumps on board
• Markets go into reverse – Nasdaq loses another 2%
• Investors raise cash from the outperformers
• Oil churns at $102
• Lonnie now has $46 billion to take TWTR private….
• Try the Grilled Pork Chops with Sweet Vinegar Peppers

So, it was tale of two cities and in fact has been a tale of two cities since the start of the year…..Nasdaq and the sexy high growth under fire, while the bigger, boring names have offered shelter from the storm……and while for the most part there hasn’t been a broad market meltdown – there has been turmoil…..Nasdaq now down 16% – double that of the S&P and 4x more than the Dow….the talk in the beginning of the year of gentle 25 bps rate hikes and a slowing of the bond buying, has turned into 50 bps hikes and a swift reduction of the $9 trillion balance sheet.  Every member of the FOMC (Fed Open Market Committee) all jumping the fence, and all in the same ‘the FED has to be more aggressive’ camp. 

And then, The FED had their ‘plants’ (think Goldman, Blackrock etc.) doing all they can to convince us that while 50 was necessary it was NOT a game changer at all.  Nothing to see here, nor is there anything to worry about.  Rising rates are GOOD for the economy.

And then the macro data continued to get worse – inflation now printing at 40 yr. highs with no end in sight – even as much as they try to convince us it is transitory.  Weakening PMI’s and falling average hourly/weekly wages only adding to the angst.  Mortgage rates now up more than 70% in 3 months has begun to put the brakes on the red-hot housing market…and the FED has not even started to raise rates – imagine what happens when they actually do raise rates. 

10 yr. treasury’s have spiked higher as well during this time…. bids disappearing (as the FED is no longer the buyer of last resort – or at least that is what they have told us) and that has sent yields surging…. taking them from 1.6% to 2.98% in less than 3 months.  Along the way – we did have a bunch of inversions in the bond market and that led so many to predict that a recession was now a real possibility at some point in the future…. which is comical – why?  Because it is not a possibility, it is a reality, a recession is coming (and that is not create panic – it just the fact, it is not a reason to jump out of the window, it just means prepare yourself by getting ready for that event).

And then on Monday – St Louis Fed President Jimmy B – floats the idea that the FED needs to be even MORE aggressive suggesting that a 75-bps hike ‘is on the table’ (which is code for 100 bps hike is under consideration too!)   That put some additional pressure on the Nasdaq as the algo’s hit the SELL button and moved money further into the value/defensive sectors.

And then yesterday – Jay Powell was at some roundtable event with Christine Lagarde (of European Central Bank fame) and made it clear that 50 bps was on the table all while Lagarde suggested that she was about to get ‘tough’ on out-of-control European inflation and the market suddenly went south…. Why?  It is no big deal, they have been telling us that for months now – the market ‘had it priced in’, Goldman assured us that it’s nothing to worry about.  So then, why did the Dow and S&P suddenly get weak?  Was Jay suggesting something else?  Was the Jimmy B commentary earlier in the week becoming a reality?  If it really is 50 bps – then we shouldn’t have had the reaction….but we did…and by 4 pm – we saw the Dow off by 370 pts or 1%, the S&P gave up 65 pts or 1.5%, the Nasdaq got slammed (again) down 280 pts or 2%, the Russell took it on the chin – falling 47 pts or 2.3% and the Transports fell 55 pts or 0.4%. 

And so – what the tells you is that the market is not convinced that the narrative is the narrative.  Fed Funds futures are now pricing in a 50 bps hike in May and a 75 bps hike in June…but much of that will depend on what the next CPI and PPI reads are…..and don’t expect them to have peaked….they have not….next months CPI has to react to last week’s 11.2% PPI print……so don’t think this is over just yet, which is why we are now discussing 75 and possibly 100 bps hikes in the not so distant future. And that is NOT priced in (yet)….and the only way it will be- is if the market re-prices that new outlook – which is what it is doing….

Every sector was under pressure yesterday…. Energy down 3%, Communications down nearly 3%, Basic Materials, Tech and Utilities all down 1.6%, Industrials, Healthcare and Consumer Discretionary down 1%, Consumer Staples flat on the day (which is a win).

Metals and Miners – XME – lost 6%, Steel – SLX lost 3%, Oil Services – OIH lost 4.5% – which makes sense because traders and investors are taking profits in the sectors that have outperformed to have cash available…remember that YTD –  the XLE +44%, XME + 40%, SLX + 29%, & OIH + 60%  so those moves lower make complete sense if an anxious environment.

Coal stock – BTU got whacked – down 12%, CRK – natural gas lost 4.7% but again – investors ringing the cash register….BTU was up 183% ytd while CRK was up 112% ytd coming into yesterday….so when the tone gets ugly – investors will take profits first in sectors that have outperformed vs. selling sectors that are already under pressure… which is why this weakness is not a surprise – Capisce?

Then add in the geo-political crisis that is taking place and the latest lockdowns across China due to ‘covid’ and you add all kinds of supply chain issues and ripple effects to the conversation again…. which is not seen as bullish.  Talk of empty shelves for ‘back to school’ sales and YES – the Christmas shopping season – are already taking place in the media…. (As they try to ramp up the level of angst, so that you feel compelled to go shopping now!)

Economic data today includes both Manufacturing and Services PMI’s (Purchasing Managers Index’s) and they are both expected to report 58….which leaves us in expansionary territory, so this will be another KEY metric as it speaks to the health of both of those sectors – and remember – the US is a 75% SERVICES economy…so the services PMI will be one to watch.

Earnings today include CLF (they beat), SLB, HCA, KMB, VZ.

Oil – continues to churn in line here at about $102/barrel…. Holding above the trendline at $98. 96..
US futures all under pressure…. Dow down 125 pts, the S&P off 15, the Nasdaq down 45 and the Russell off by 6 pts.

On a side note – Lonnie Musk has commitments for $46 billion ($3 billion more than the original bid) to take over TWTR…. let us see what happens now. TWTR quietly ‘changing’ the setting on their algo’s to make it look like that are not ‘censoring’ the conversation…. Who is kidding who???? 

European markets are lower…..FED and ECB commentary causing some angst,  UK retail sales data disappoints and French luxury retailers taking it on the chin…..for both what is happening in Europe as well as what is happening in China – the rumor being that Chinese women are unable to purchase luxury items because they are locked in their apartments – so Kering loses 5%!  (Comical!)  French elections are also putting pressure on investors – voters heading to the polls on Sunday to choose between Manny Macron and Mari Le Pen…. Goldman telling us that this is a ‘decisive moment’ in French history. At 7 am – markets across the region are all down better than 1.5%.

The S&P closed the day at 4393 – down 370 pts in a major reversal….breaking down and through the 50 dma trendline at 4412…..leaving us once again below all 3 trendlines as we approach the May FED meeting and 10 yr. treasury’s once again attempt to ‘kiss’ 3% all while Jimmy B hints at 75 bps rate increases (which I think really means 100 bps increases) and Jay Powell attempts to tell us that we are only in for multiple 50 bps increases – which screams that someone isn’t be honest with investors and Americans.  I mean yesterday – Jay revealed that the job market is “too hot….it is unsustainable hot” – his words not mine – showing clear concern for what is coming.   Again – like I have been saying – one of two thing is going to happen …. either the administration and their talking heads will tell us how great 3% is for the economy and that there is nothing to worry about – OR a breach at 3% will ignite a firestorm of selling as the reality of higher interest rates takes a further toll on the economic recovery.  Either way – there is always an opportunity for those that are paying attention.  

Bitcoin is churning…. trading at $40k while Ethereum is trading at $3k.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Grilled Pork Chops w/Sweet Vinegar Peppers

Cost:  $45 for a family of 4.

This is an easy dish and not one that you might think of readily…but make it easy on yourself…. for this you will need only 4 things really. You need center cut bone-in thick pork chops, olive oil, sweet vinegar peppers (you can use hot if you prefer), s&p and chopped scallions. 
Preheat the grill.
 
Rub the chops with olive oil, salt and pepper – Place chops on grill and sear for about 3 mins then turn over and continue cooking for another 4 or so mins on reduced heat. Do not burn them.

While the chops are cooking – open the jar of sweet vinegar peppers, slice in half and sauté quickly with some of the juice in a sauté pan – really just to warm them up – you are not “cooking them”.
Now remove the chops from the grill – place on a warmed plate. Top with the sweet vinegar peppers. Serve a lg salad – maybe mixed – romaine, some spinach, Boston bib, sliced red onions, and tomatoes. Dress with a simple balsamic vinaigrette.

Buon Appetito.