Things you need to know
- NFP continues to suggest a strong labor market
- Stocks closed lower as another FED head repeats the narrative
- Oil – kissing $120/gal. The national average is now $5.15/gal
- Jubilee is over and now Boris faces a vote of No- confidence.
- Try the T-Bone from the Trentino/Alto Adige region of Italy
And stocks ended the week lower again…. Friday’s NFP report did show that we created (restored) 390k jobs – which was less than last month yet still above the estimate and that is what analysts and strategists cited for why stocks sold off. Look, a strong labor market will add to the pace and rate of inflation because competition will give workers more wage bargaining power – leading to the wage/price spiral that we saw back in the late 70’s. Continued upward pressure on wages will force companies to raise prices to cover those wage increases which will only force workers to demand more…. All you need to do is go back and study history to understand how that works – and for those of you who were not around in the late 70’s – good luck.
The unemployment rate held steady at 3.6%, the underemployment rate rose to 7.1%, and average hourly earnings fell to 5.2% y/y while inflation is running at 8.5% (officially). Now to be clear – this report is one of the Fed’s biggest data points to consider when making policy decisions – but that is no longer the case right now (because of the swift pace of building inflation and the fact that they are backed into a corner) and so do not look for this report to sway the committee.
In addition – ISM Services PMI fell to 55.9 while S&P Global ISM Services fell to 53.4….and while both remain in the ‘expansion camp’ the trend is moving lower which is just another warning flag for investors. Remember that 50 is the neutral line…. anything below 50 is considered contractionary…and while we are not there yet – the trend is down…and this is more important why? Because the US economy is a 75% services economy….so this data point is very relevant.
By the end of the day the Dow gave back 350 pts or 1%, the S&P lost 70 pts or 1.6%, the Nasdaq gave back 305 pts or 2.5%, the Russell gave up 15 pts or 0.8% and the Transports lost 45 pts or 0.3%.
10 yr. treasury yields ended the week yielding 2.93% and this morning yields are up 2 bps at 2.957%.
Fed Vice Chairwoman Lael Brainard said on Thursday that she would support continued 50 bps rate increases at the next two meetings (June and July) and did NOT rule out raising rates at that pace in the fall. Notice how they are all falling in line AFTER the Fed’s Chris Waller made those aggressive comments in Germany a week ago. We have now seen Bullard (no surprise), Daly, Williams, Brainard and Mester repeat the same narrative……and with Fed funds at 1% on their way to 2% by July they are still a good 6.5% below the rate of inflation – that is assuming that this week’s CPI and PPI reports do not show higher rates.
Now, what we are starting to see are companies ‘adjust’ guidance as we are just 4 weeks from the start of the 2nd qtr. earning season and it was led by one of the nation’s stalwarts – MSFT. Last week – they cut both the sales and revenues forecasts and that initially sent the stock lower – but if you read the statement – much of that is due to the stronger dollar – and that makes sense. Every multi-national company out there is going to have the same ‘strong dollar’ issue – so get ready to hear them whine about ‘currency issues’ in the weeks ahead. When you sell a product in a local currency and then convert it back into strong dollars – you get ‘less dollars’ – which then sets off all the bells and whistles on ‘lower revenues’….to which I would say – any analyst (or investor) that understands how currencies impact revenues KNOWS this and so their estimates should reflect this – currency issues should not be a surprise to anyone…..…again it’s a math problem…not a demand problem.
So last Thursday when this announcement was made – the algo’s sold the stock off…because what they saw was the headlines…. ‘MSFT CUTS REVENUES’ and boom…. hit the sell button…. It is ridiculous from an investor perspective…. did MSFT’s business change? Is there a fundamental difference in MSFT between Wednesday before that announcement and Thursday after the announcement? NO, but there was a difference in price, so after the ‘panic – OMG’ sell reaction- longer term investors took advantage of the price decline – buying stock on weakness only to see it end the week higher…. I suspect that we will see more of that in the coming weeks – with companies pointing to the strong dollar as reason that they are missing estimates…. pay attention to those announcements – understand if it is just a currency issue or is it a fundamental issue.
Oil continued to move higher and ended the week at $118.80 and this morning it is up another 40 cts trading at $119.27…..Gas prices at the pump are also on a tear and word has it that a gas station in CA is now charging $9.95/gal (the national average is better than $5/gal)……so remember when we thought $5/gal was going to be tough to take? Imagine what $10/gal is going to do to the consumer. And diesel gas? That is up 59% since the start of the year – imagine what that does to truckers and transportation expenses….and who do you think is going to ‘eat’ those increased transports costs? But remember – on Thursday when we get the May CPI report – they will take out ‘food and energy’ to smooth it out….and tell you how inflation is peaking…. blah, blah, blah…. It is all smoke and mirrors. In any event – Oil did trade as high as $120.82/barrel overnight….and going higher especially now that China is re-opening again. We are now above the highs reached in March with the path of least resistance higher, not lower.
US futures are up this morning! At 6 am – Dow futures were up 265 pts, the S&P’s up 42 pts, the Nasdaq is ahead by 176 pts and the Russell up 22 pts. There is nothing new, no news story that is fueling this rally higher. Other than commentary from our friends at Goldman that are telling the news wires that the Fed has it all under control….no need to worry. Inflation is peaking and the FED will not push us into recession any time soon. Yes, go with that….
On the other hand, my good friend Quincy Krosby – Chief Equity Strategist at LPL financial said –
“The market finds itself between wanting to believe in the rallies, but not believing that the FED can negotiate a soft landing.”
And that will continue to cause the spike rallies and then the sharp reversals.
Eco data today – is nothing…but the big reports will be on Friday and that will be the May CPI (Consumer Price Index) report. Now the estimates suggest that top line CPI will surge by 0.7% (up from +0.3%) m/m, BUT that ‘core CPI – Ex food and energy will come in at 0.5% down from +0.6% m/m. Y/Y estimates suggest +8.3% and +5.9% – both LOWER than last month – and if that is the case – then expect them to toot their horns about how the FED is succeeding in tamping down inflation……something I just do not buy…. I mean have you been out in the world lately….? Have you seen the prices of anything? In any event – investors will need to parse the data and then invest accordingly.
European markets are up partly due to the ‘market is oversold’ mentality and the idea that this week’s CPI report will prove that inflation is peaking in the US and that may mean Europe has seen the worst of it as well. Both arguments that I disagree with – but that is what makes a market – differing opinions. At 6 am – markets across the region are all higher by 1%. On a side note – the Queen’s jubilee celebration is over and now UK PM Boris Johnson is facing a vote of ‘no confidence’ amid increasing dissatisfaction in his leadership. Stay tuned…. If he loses – he will be forced out and a search for a new gov’t begins. The vote is scheduled for about 1 pm est.
The S&P closed at 4108 – This morning’s action suggests that we could test last week’s high of 4177…. again – many will tell us that the worst is over and that the bottom is in…. I am not convinced yet….and remain on the cautious on side of the equation. Expect this week to be about all of the speculation around the CPI and the Consumer confidence report – which is expected to come in at 58.3 – which is flat m/m. We remain in the broader trendline resistance/support range of 4276/3800.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
T-Bone – Trentino/Alto Adige Style
Today’s dish hails from the very northern region of Italy – called Trentino/Alto Adige….this is a complex place and has a variety of influences that are visible in the language, the food, and the culture. During his rule (1805-1814) over Italy – Napoleon Bonaparte annexed this land from Austria. He then renamed the region Adige – reflecting the Adige River that runs thru it as he sought to erase any historical affiliation to Austria.
The people speak Italian, and the Austro/Bavarian dialect of the German tongue. As a result, they appreciate foods with ingredients like sauerkraut, horseradish and liverwurst, food much closer to the Austro-Hungarian empire than the Roman empire – so yes – this is Italy, but this dish is not pasta, polenta or Parmegiana. It has no cream or tomatoes. It does have garlic and wine. It is a steak dish sautéed in onions with white wine -…….Easy to make and not fancy at all…. Takes no more than 30 mins to make and serve.
For this you will need: thin sliced T-bone (or some other cut of thin sliced steak), butter, garlic, white wine, onions, flour, and s&p. (Mushrooms – optional). **I also add a shake of oregano – as I like the taste…it is completely up to you…try it first on a small piece and see how you like it.
Season the steaks with s&p… then lightly dredge in flour. Set aside.
Now start by slicing the onions, mushrooms (if you are using them) and garlic and then sautéing in butter and olive oil in a frying pan large enough to accommodate the steaks. Keep the heat on med so that you do not burn the butter or the onions.
Set aside. When the onions are soft and translucent – turn up the heat and add the steaks. Brown on one side for about 3 mins…. turnover and now add a splash of white wine – like 1/2 cup. Scrap the bottom of the pan and allow the wine to steam off a bit. If it all evaporates – feel free to add just a bit more…. cook for about 3 more mins… (depending on thickness – but remember – you do not use a thick steak for this dish).
When done – you can serve three ways: 1. Make a bed of onions/mushrooms and then place the steak on top or 2. Place the steak first and then covers in a blanket of the sweet wine infused onion/mushrooms or 3. Slice the steak on a diagonal and serve family style surrounded by the onions & mushrooms.
Serve with a garlic/herb rice pilaf and a mixed green salad. Have the Chianti available for your guests.
This should cost you about $50 dollars to feed a family of 4.
Buon Appetito.
