Things you need to know     

• The rally fizzles (again) – confidence plunges
• Lagarde promises to go easy
• Williams, Daly and Mester push for higher rates…mimicking JJ’s stance
• Oil remains higher – as the US is now well into ‘hurricane season’
• Tomorrow is end of month and end of quarter – And?
• Try the Boiled Lobster, Drawn Butter, Cole Slaw, and Corn on the Cob

Consumers are growing weary….they are tired and they are concerned about the  outlook for the US economy….yesterday we learned that Consumer Confidence plunged to a low not seen in a decade….driven by concerns about the rising cost of living…..but more specifically – the rising cost of food, energy and housing…the things you need day in and day out…..Yesterday’s read was expected to be 100 – down from 106 – already a concerning number,  but when the print hit the tape, it was even more dire….coming in at 98.7 and what is even more worrisome is that future expectations are well below 80 for the second half of the year….and that suggests that more and more people believe that we are either in or on the cusp of a recession…..no matter what the talking heads want you to believe.

Recall that earlier in the month – we heard from the U of Michigan and their Consumer Sentiment indicator (which measures how they feel about their personal finances) had fallen to a record low so yesterday’s report should not be that much of a surprise.  Now when both of these reports decline in tandem – that usually points to a decline in consumer spending and BINGO…. May’s retail sales numbers were also lower…. In addition, the FHFA Housing Price Index moved up 1.6% m/m vs. the expected rise of 1.4% while the Richmond Fed Survey was also weaker than the analysts expected – notching a loss of 19 vs. the expectation of a loss of 7.

In the end – if the idea is that a recession is coming (or is here) a ‘strong labor market’ will not prevent your living standards from eroding as inflation kisses 9%……and you are having trouble putting food on the table, gas in your car or a roof over your head.  And then we heard from two more FED heads – San Fran’s Mary Daly and NY’s Johnny Williams and both remain steadfast in their view that rates will continue to rise (at a brisk pace) in order to slow down the economy and bring inflation under control….

Over in Europe – ECB (European Central Bank) President – Christine Lagarde told us that they are prepared to raise rates ‘gradually’ (vs. being more aggressive like the FED) over the next 6 months to combat ‘stubbornly high inflation’…. recall – the ECB still has negative rates while inflation across the Eurozone is running at 8.1%!  My guess is that she will realize that ‘gradual’ ain’t gonna cut it and so I expect that narrative to change.

On a side note – watch what happens to inflation as summer turns to fall and fall turns to winter and the cost of heating their homes skyrockets because of the disruption in oil brought on by the Russia/Ukraine crisis – which by the way SHE can’t do a thing about….rising rates will not create more oil supply, it will not bring the cost of energy down – the energy issue is a ‘supply/demand’ issue and the fact that Europe went all in on Russian oil supplies a decade ago is now proving to be the mistake of the century….but that’s another story.

And another side note – Europe (like the US) is now firing up some of those old, closed down coal firing plants to help ease the burden, but you can bet that those on the left are not happy…. but again – that is another story…. Have you seen what coal stocks have done this year?  BTU + 135%, CEIX + 140%, ARLP + 47%, ARCH + 70%…. reminding us that ‘there is always a bull market somewhere…’

By the time the closing bell rang at the NYSE – stocks were in a slump – the Dow had given up 500 pts or 1.6%, the S&P lost 80 pts or 2%, the Nasdaq got crushed again – choking up 345 pts or 3%, the Russell lost 35 pts or 1.9% and the Transports gave back 235 pts or 1.7%.

Tech – XLK  – 3%, Consumer Discretionary – XLY down 4%, Communications – XLC down 2.8% were the worst…..Everything else was down about 1+% with the exception of Energy- XLE which was up 2.7%.  Retail – XRT down 4%, Disruptive Tech – ARKK down 6%, Semi-conductors – SOXX down 2.5% all while the contra trades rose as expected.  DOG, PSQ, SH, VIXY, SPXS.

Now what is interesting is that last week’s weak economic data caused investors to take stocks higher on the idea that ‘bad news is good news’ – meaning that the weak data would slow the FED from being more aggressive with some even suggesting that it would make JJ (Fed Chair Powell) and his band of merry men reconsider monetary policy (think become less aggressive in their language and their policy moves) – but yesterday’s weak data is an example of  ‘bad news is bad news’ for the markets……you see – if you have inflation expectations going up at the pace the report suggests then that means that the FED will have to become MORE aggressive and not LESS aggressive and down you go! 

Next up is the end of month/end of quarter event that usually creates a bit of drama and excitement as portfolio managers shuffle the deck and prepare for the start of the new quarter and that rebalancing will become clearer today and tomorrow as the clock ticks.

The 10 yr. treasury rose in price (think safety trade) and that caused yields to move lower….ending the day yielding 3.17% down from 3.25% earlier in the week – a move that continues to dumbfound many as the path of interest rates is clearly UP and not down…..but let’s not quibble – the Fed is expected to raise rates by at least 75 bps at the end of July (recall that JJ put 100 bps on the table for us to ‘consider’)  and that would bring Fed Funds up to 2.5% which should cause treasury yields to move up and thru 3.5% – on its way to 4% by the winter.

Oil – remains in the $111/$112 range after testing as low as $101 last week.  In addition to the ongoing supply crisis brought on by strong demand and the elimination of Russian supply from the market – it is ‘hurricane season’ in the US and that which will surely bring some disruptions to refiners as the weatherman estimates that we could see 40 named storms this season….Remember – the season goes from June 1^st to November 1^st…..so all I can say is that we have one month under our belt – 4 to go!  Recall that Jamie Dimon (JPM CEO turned meteorologist) did tell us in early June that – ‘A hurricane is coming….’ …. Oh right – he meant a ‘financial hurricane’ not a weather-related hurricane.   Sorry….

This morning we are seeing US futures attempt to push higher…. but significantly less than they were on Monday or Tuesday morning.  At 5 am – Dow futures up 30 pts, the S&P up 2, the Nasdaq up 10 and the Russell is up 1.  Expect trading to remain erratic and at times unexplainable as the month and qtr. comes to an end and portfolio managers ‘rebalance’ their portfolios and investors re-allocate investment dollars.

Eco data today includes Mortgage apps and the final revision to 1^st qtr. GDP and that is expected to remain at -1.5%.  So, no surprises there.  Tomorrow though does bring us the favored FED inflation gauge – the PCE Deflator (Personal Consumption Expenditures) and it is expected to rise by 6.4% y/y and 0.7% m/m – BOTH readings that are higher than they were last month….  Listen to how they interpret and report it…..I suspect that if it is higher – they will say that it is a lagging indicator and that next month’s reading ‘should be’ lower…..If it is lower than the estimate – then they will say – ‘See, we told you…inflation has peaked and is moving lower….’  Whatever! 

The reality is – inflation is what you perceive it to be…..if you never go to the grocery store, then you have no idea what it costs to buy groceries – something I think JJ or any of the others don’t understand…..When was the last time the Washington Post published a photo of JJ (or any of the others) standing in line at the local supermarket or at the local gas station in DC buying groceries or gas?  Exactly….

European markets are under pressure….as investors there weigh in on the economic outlook……The ECB is hosting a ‘forum’ in Sintra, Portugal and both Christine Lagarde and JJ Powell are expected to address the crowd later today.  Inflation in Spain jumped to 10% – that is up from last month’s read of +8.5% and that is causing ECB policy makers to tell Lagarde to ‘wake up’…. gradual ain’t gonna cut it.  At 5 am – markets across the board are down about 0.75% – 1.25%.

This morning we are hearing from Cleveland Fed President Loretta Mester and guess what she is saying?  Let me help you…. ‘Strap in – the FED is just at the beginning of raising rates…’  What I think is comical is that she thinks she is telling us something we don’t know……She is calling for fed funds to be in the 3.5% range by year end and 4.5% by next summer, she is pushing for at least a 75 bps move in July….she also told us that while there are risks of recession as the FED tightens monetary policy, her baseline forecast is for growth to slow this year, not enough to force a recession.  Ok – let us go with that…. (For now).

The S&P closed at 3,821 after testing as high as 3945 and as low as 3820 – a 124 pt. swing….……We did close the gap created on June 13^th…. but failed to close the gap created on June 10^th….  We remain in the 3600/4000 trading range….

Friday is July 1^st, and it is the long 4^th of July holiday weekend.  I expect all of the action will be packed into today and tomorrow….Friday will see so many hit the road to escape for the holiday….Earnings begin anew on July 14^th……and this season is expected to be interesting as we learn what the C suite thinks about what the future holds….Expect to see more ‘revisions’ in the days ahead as analysts ‘sharpen’ their estimates and companies offer some clues as to what might be ailing them as we move into fall.  Watch as the retailers set us up for the ‘back to school’ shopping season – who though, will be the first to push us to get ready for the Christmas shopping season?   It is exhausting….

Stay focused…. continue to put money to work overtime and not all at once…. it is called dollar cost averaging and works to your benefit if you stick to the plan…. Talk to your advisor – get comfortable with where you are and why you own what you own.  Stick with the stalwarts in anxious times…. big and boring can be beautiful…. Capisce? I remain in the camp that says we cannot avoid a hard landing and so I remain cautious as we move into the 3^rd qtr.   I suspect that the market will be forced to re-price and re-test S&P 3600.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Boiled Lobster, Cole Slaw and Corn on the Cob

Ok – its July 4^th weekend…. time to have steamed lobsters and drawn butter – serve this with a side of classic cole slaw and corn on the cob.  Set the picnic table on the beach so you can hear the sound of the ocean waves slapping against the sand.  Take your turkey fryer and fill it with water to boil the lobsters and the corn.

This meal will cost you…..so get ready…lobsters are expensive – think of the gas the boat needs to go out to the traps…

So, for this you need – Your turkey fryer and portable propane tank.  6 – 1 ½ lb. lobsters, plenty of melted butter, classic cole slaw and 6 ears of corn.

Start by sparking up the fryer to get the water boiling.  Once it boils – drop the live lobsters (headfirst) into the pot – do not overcrowd – maybe 3 at a time…. (Never cook a dead lobster).  Let it boil for 8 – 10 mins max – remove and repeat.

Now place the lobsters in a big cooler (just to hold them – do not ice them).

Toss that water out and melt 3 sticks of butter in the pot – set aside.

Bring a fresh pot of water to a boil – add some whole milk and a stick of butter and drop the corn in…. let that boil for 5 – 8 mins…. remove and place in a large bowl.

Now – go for it…. Grab the nut crackers that you will use to crack the lobster shell – remove the meat – dip in the drawn butter, enjoy with the cole slaw and corn on the cob.  And the best part after you eat – jump in the ocean!  Happy 4^th.  Tomorrow, I will give you Blueberry Pie and Vanilla Ice Cream!

Buon Appetito.