Things you need to know     

• Deep Throat Revisited – another 1970’s memory
• The WSJ runs with the story – The FED has changed course
• 10 yr. yields spike higher as the bond market bids disappear
• Everything got slammed – the S&P now in BEAR Mkt Territory – leaving only the Dow in correction territory
• Try the Classic ‘Screw’ Driver Cocktail!

And stocks got slammed (again) to start the new week….as investors/traders and algo’s got themselves all worked up over the weekend after the latest CPI report showed inflation is running at highs not seen in 41 yrs.…. leaving them to speculate about what today’s PPI is going to reveal and then what Wednesday’s FOMC remarks are going to be.

Stocks sold off HARD right out of the gate and only weakened further as morning turned to afternoon and afternoon turned to early evening….The Dow lost another 800 pts or 2.8% leaving it just on the cusp of a BEAR market down 16%, the S&P gave back 3.9% or 151 pts taking it squarely into BEAR market territory down 21.3% ytd, the Nasdaq got absolutely clobbered – falling 530 more pts or 4.7% leaving it down 31% ytd, the Russell lost 85 pts or 4.8% and the Transports gave up 3% or 405 pts leaving both of those indexes down 24% and 21% ytd.  So, the only index that remains in ‘correction territory’ is the Dow – All of the others are screaming more trouble ahead.

The 10 yr. yield rocketed higher – closing up 20 bps to end the day yielding 3.36%!  while the VIX rose 22.6% to end the day at $34.02 – still well below the $40 level that will surely ignite complete panic in the markets.  And while you say that the beating the market is taking is tough – it has not elevated itself to ‘panic mode’ just yet…. but that is what needs to happen in order to complete this latest cycle – when will it happen, no one really knows – but my sense is that we are getting closer…

Look – the market is screaming for someone to listen….it is telling you that inflation is alive and well and that if someone doesn’t start paying real attention, then the market will do the heavy lifting and reprice equities based on what it thinks should be happening…and that is for rates to move up and move up faster then what the FED has been yapping about.   50 bps moves are not what the market NOW expects – the story that the FED was telling us is NOT the story that is being written – so wake up.

In fact – someone is listening, and someone is talking (to the press in what can be described as a 1972 style Mark Felt moment*) And the WSJ ran with this story yesterday afternoon and again this morning…

“Fed Likely to Consider 0.75% Point Rate Rise This Week”

*Now for those of you who do not know who Mark Felt is – he was a law enforcement officer that worked at the FBI during the 1972 Watergate Scandal.  If you do not know what the Watergate Scandal is – I cannot help right now – google it.  Felt was the one that ‘leaked’ the information about President Nixon’s administration’s involvement in the Watergate Scandal to Bob Woodward who then shared it with Carl Bernstein – both reporters for the Washington Post. The Post then published the story that would change the path of history forever.

So I have two things to note here – That was in 1972 – so again we are harking back to the last century just like we are when we discuss inflation that was rooted in the economy of the 70’s and 80’s and it was a reporter that spoke to ‘someone’ identified only by the name ‘Deep Throat’ – a pseudonym to protect him from being identified by anyone in the administration which is apparently what happened over the weekend…(my bet is Neely Khashkari….Pres of the Minneapolis FED – a non-voting member) 

And that is apparently what happened over the weekend – a Deep Throat personality spoke to someone (apparently – Nick Timiraos – the reporter who wrote the story) about the panic going on at the FED…. How could they raise rates by 75 bps after JJ promised us that 75 bps was NOT something being considered? (It was nothing but hyperbole) They needed to ‘get it out there’ they needed to put it back in the global public square (GPS) fast – after the horrific CPI report on Friday and the expected elevated PPI report that is due out today.  How could they raise rates by 75 bps without panicking the markets?

Well, they couldn’t NOT panic the markets but they needed to put it out there so that when they make the announcement the markets will NOT be SO surprised….because NOW it’s out there….they can point to the story, they can point to continued rising inflation and they can now say that the plot has thickened.

Ok – and now they can change what happens next month and the month after that and the month after that.  And as expected now that Deep Throat has spoken – all of the big banks are now lining up – Goldman, JPM, MGS, Jeffries, etc. all calling for a 75-bps rate hike…. because they got ‘the call’ to fall in line or risk being boxed out by the gov’t.  They need to show support and try to stop the bleed so if they join in the narrative – then it makes it all ok.

Now, everything is now on the table 75 bps and even 1% pt. moves.  Inter-meeting rate hikes are also now ON THE TABLE.  Enough of playing nicey-nice in the sandbox…it is time to get tough, in fact it WAS time to get tough one year ago (June 2021) after that May spike in the CPI that took us from +1.6% to 3.1% in one move.  We blasted up and through the 2% target that we had identified as the trigger point for a change in FED policy way back in the mid-teens of the century…and when we had the chance to honor that ‘trigger point’ – what did we do?  ABSOLUTELY NOTHING.  In fact – JJ had the audacity to tell us that it was a ‘one off,’ that it was not real, that it was – get ready cause here it comes……it was transitory!  He got all of the other FED members (and the big banks) to sing the same song – trying to convince us that WE were all wrong, that they knew better, that rising prices would never last – Yeah!  How is that working for you?

So all eyes today are going to be keenly focused on the PPI report – the estimate – which was + 10.6% Monday morning suddenly got revised to +10.9% by Monday afternoon, no one noticed, no one pointed it out, but this is the exact same thing they did with the CPI last week…..the call was originally for the CPI to be +8.1% -down from last months +8.3% – and then suddenly on Thursday evening – the official estimate was changed to +8.3%  after the WH revealed that even they thought CPI was going to be stronger than the estimate….and in fact it was….coming in at +8.6% – which was 0.5% greater than the original estimate…..so by raising the estimate – it wasn’t supposed to look nearly as hot as it was. LOL….

It was ugly everywhere…..Energy – XLE down 5% (but is still up 51%), Housing – XHB down 5% (now down 34% ytd),  Semi-conductors – SOXX lost 5.8% (down 32% ytd), JETS (airlines) down 7% (down 20% ytd), Metals and Mining – XME lost 7.5% (still up 7% ytd),  Tech XLK, Consumer Discretionary – XLY, Real Estate – XLRE, Utilities – XLU all down more than 4.5%, Basic Materials – XLB, Healthcare – XLV and Industrials – XLI all down more than 3.5%, Financials performed the best – the XLF only down 2.9% leaving it down 20% ytd!  BTU lost 10% but remains up by 131% ytd.

And again, the contra trade is where all the money is being made – the SARK (short tech disruptors) up 11% yesterday taking it up 71% ytd, DOG, PSQ, SH and VIXY all advancing as the market melts down… they are all up significant double digits since January.

If the Fed ends up raising rates by 75 bps or more this week, it means that they aren’t able to accurately signal the pace of future rate hikes the way they want because they were forced into this corner and had to strike out in what some might consider a desperate move to suggest they are in control. (They do not appear to be).  But in the end – it is important that they get policy right – who wants to bet that they get it wrong again?   

Pay close attention to what Powell says about the size of the likely rate hike in July and the months beyond.  I anticipate that he will show more flexibility to larger rate hikes given the latest CPI report, the stalling housing market as 30 yr. mortgage rates are now approaching 6%, surging gas and food prices, ongoing supply chain disruptions and inflation that is not responding to the narrative, he probably regrets being so dismissive about larger hikes back in May.

This morning US futures are up but down significantly from where they were at 4 am.  Dow futures now up 70 pts, the S&P up 13, the Nasdaq up 67 and the Russell is flat.  Earnings estimates for the year are now coming down and coming down significantly from where they were in January…so that sets us up for a weakening economy and an inevitable recession…. there is no way that the FED can now manage a ‘soft landing’ – so we should prepare for a ‘crash landing’ and hope for just a ‘bumpy landing.’

European markets which started the day higher have all turned lower by 6 am.  Markets across the Eurozone are all down between 0.5% – 1.5%.  This as investors get whipsawed while they assess both the inflation risk and the recession risk.  If the Fed goes up by 75 bps and suggests more aggressive moves ahead, what does that mean for the ECB – who is WAYYYYY behind the 8 ball in terms of rates vs. inflation….  Currently rates are -0.25% and inflation are running at +8.1%.  Capisce?

And the Bitcoin – crypto carnage continues…trading down to just above $21k taking the whole group lower. Everything in Crypto land bleeding out.  All of the Crypto talking heads telling you ‘Not to worry’ it is buying opportunity!

Oil is trading at $121.70/barrel – a drop in exports from Libya amid another political crisis, OPEC producers that are struggling to meet ‘quotas and Russian oil bans all contributing to the supply tightness.  I am not even going with the China lockdown story…it is exhausting and unnecessary.

The S&P closed at 3749 – breaking my 3800 target fairly significantly.  While it struggled to hold on – in the end – it could not.  I am now in the camp that the failure to hold will cause all of the algo’s to go into a selling frenzy as another technical level gets shattered – leaving S&P 3600 as the next downside target. I am remaining hopeful but setting myself up for more trouble ahead. Just sayin’….     
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

The Classic ‘Screw Driver’ Cocktail

Since it feels a bit like we are about to get ‘screwed’ what could be better than the classic Screwdriver Cocktail?

It is easy and should cost no more than $30 to ‘feed’ a party of 15 or 20 people.

You need the Vodka – Tito’s, Grey Goose, Belvedere – whatever you choose…Orange juice, orange slices and plenty of ice.

Line up the glasses – add the cubes, then pour 2 oz’s of vodka and 3 oz’s of orange juice. Stir and add the orange slice to make it look pretty.

Enjoy.

Buon Appetito.