Things you need to know
- CPI boils over, what will PPI do?
- The FED is NOW expected to go 100 bps on July 27th.
- ECB is now in focus – how will they respond?
- Dollar strength is causing commodities to back off
- Let us go with the Potato & Eggs for Breakfast, Lunch and Dinner
It is HOT in the kitchen…. You can hear inflation sizzling on the front left burner while a recession simmers on the back right burner, rising interest rates are cooking on the front right burner while job losses are heating up on the rear left burner…. the CPI now bubbling over creating a mess all over the stove…….
Stocks were all over the place – but ended the day solidly in the RED – but not disastrously in the RED…the Dow gave up 210 pts or 0.7%, the S&P lost 17 pts or 0.5%, the Nasdaq gave back 17 pts or 0.15%, the Russell ended basically flat – down 2 pts while the Transports lost 171 pts or 1.3%.
……Good morning….it’s the day after…..and we are all now trying to understand what happened yesterday…the CPI came in at a much hotter than expected number….+1.3% m/m vs. the estimate of 1.1% and 9.1% y/y vs. the estimate of 8.8%….while CPI Ex Food and Energy – was equally as hot…coming in at +0.7% and 5.9% – when the expectations were for +0.5% and 5.7% respectively. And all that means is that inflation is NOT just about food and energy (because when you take those out – you still have higher inflation and higher than expected…) ….so this idea that ‘inflation is under control’ is nothing but – well let us just say it is NOT under control.
Joey, telling us that it is not as bad as the numbers suggest – that in fact the report is ‘out of date’…. yes? Well, that is not helpful…. or assuring – remember the whole transitory argument? How long did they run with that narrative? Do you realize that inflation has been around since April 2021? That is 15 months ago with no end in sight and by all accounts it is expected to be here for at least another 12 to 15 months…. that is 2 ½ years…and that is just their best guess…. because what is clear is that nobody has any control or insight into the rate or pace of rising prices…
Look – go back and read some of my notes from last year – I made it clear that they have been stimulating since March 2009….Today is July 14th, 2022 – that’s 13 yrs. – so if you think this is going away anytime soon….you better rethink that narrative….they kept rates at zero, bought up millions of dollars in bonds and printed untold sums of money – sending traditional asset prices surging while creating ‘new’ assets (think NFT’s, Doggeycoin’s and other forms of crypto assets etc.) that have imploded – some worse than others and that is only the beginning…..
Recall ‘The Merge – the most expensive NFT in the short history of NFT’s – that sold for – get ready – $91.8 million. I think the artist is brilliant – he/she or they conned 30,000 people to put up $3,000 each to ‘buy a piece of this art’ – it’s brilliant really – but it speaks to the complete stupidity that exists in the herd mentality…The artist is laughing all the way to the bank – thinking ‘what were they thinking anyway!’
Treasuries across the spectrum went bankrupt……they all inverted – which as you remember from econ 101 is not bullish…the 2’s are yielding 3.14%, the 5’s are yielding 3.01% and the 10’s yielding 2.91%. So, no matter which way you arrange them – you cannot deny that the whole treasury market is a mess…. when short rates are yielding more than longer rates – you call mission control and say “Houston, we’ve got a problem” ….
The Dollar continues to rise – as rising interest rates tend to attract foreign investors into the currency markets increasing the demand for and value of the US dollar. The dollar index closed at another new high last night….108.35, now before you start screaming – yes it traded higher on Tuesday intraday but ‘closed’ lower…. last night it traded in a tighter range but closed higher.
And that continues to put pressure on commodities – remember – commodities are priced in dollars – so a stronger dollar usually forces commodities lower while a weaker dollar will cause commodities to rise.
Oil – the most discussed commodity at the moment continued trading erratically – (this as Joey is making a surprise trip to the desert to ‘beg’ the Saudi’s to pump more oil – because we do not have enough of our own….) it traded as high as $96.75 and as low as $95.47 to end the day at $96.40 – the BCOM (Bloomberg Commodity Index) was also all over the place…. a high of $114.51, a low of $111.53 to end the day at $113.66 0 which was up 1.5% on the day but is down by 18% since June 1.
(The BCOM includes – natural gas, crude oil, gold, silver, soy beans, corn, wheat, hogs, sugar, coffee, zinc, copper, cattle, nickel, aluminum etc.…so the idea that this group of commodities is coming down in price should take some pressure off of future CPI reads – but the jury is still out – we have to wait until August 10th to find out). Recall that the CPI also includes the cost of housing in rental form (its called OER owner’s equivalent rent) – and that isn’t going lower anytime soon and just to remind you – you do need a roof over your head, the same way you need food and energy….so while food and energy prices are lower, rents are higher and going higher….
This morning we are learning that a 1 br apt in NYC has leased for $5,058/mo – that’s a 600 sq ft apt….maybe it has one closet and you’re lucky if it has a working stove/refrigerator. Dishwasher? Don’t be ridiculous – why would it – you can’t have more than 2 people in the place! So, How does anyone afford that? They demand higher wages just to pay the rent….Saying that IF you want me to come back to NYC – then pay me more money, which causes the landlord to say, well if you are making more money – then I’ll raise the rent….It’s a vicious circle that won’t end well.
Now look – falling prices of commodities should help to quell inflation…the rising dollar due mostly to rising US interest rates is at the root of the falling commodity prices, but consumers are also tiring of such high prices, and they are pulling back – so “Yes, Virginia – “there really is a Santa Claus”! For those of you too young to understand the analogy – you need to read the editorial from the New York Sun – September 21st, 1987!
So you see, if rising interest rates are beginning to cause consumers to pull back (referred to as ‘demand destruction’) then expect the FED to keep going….because they can’t control supply so what they try to do is destroy demand, so when consumers are not demanding products anymore, supplies will start to build up and boom – you’ve now brought the demand/supply issue back into balance. Sales will start to take place as companies try to get rid of this stuff – cutting prices by 20, 30, 50 or 70%…….just to get it off of their shelves onto yours.
And what do you do? You buy the stuff at lower prices and then tell everyone you know all about the bargains you found at Macy’s, Nordstroms and Bloomies…it’s crazy…because what you should be buying are stocks that are on sale – down 20, 30 and 40%….stocks that meet the criteria of a Nordstroms or Bloomies…not stocks that meet the criteria of the Dollar Store (think Cathie Woods). LOL….
Now, no one wasted a moment to opine on what the FED will do next – in fact at 10 am – I tweeted out that I thought it would only be a matter of minutes before we saw and heard the 100 bps conversation happen (again)…..but who was the Fed going to select to start the conversation…would it be GS (again) or JPM, how about C or MS. In fact I thought it was going to be St. Louis Fed President Jimmy B – knowing that he always has something to say….but alas – I was incorrect, they must have him tied to the chair with a sock in his mouth fearing that he would suggest the FED go 150 bps or more, No, it wasn’t Jimmy – it was a foreign bank that broke the story…
Zero hedge put it out there…. Japanese investment bank – ‘NOMURA economists now expect 100 bps FED HIKE at the July FOMC meeting’ …..…and that opened the door – soon the whole street was abuzz….Atlanta’s Raffi Bostic telling us the “after today’s CPI report – EVERYTHING IS NOW ON THE TABLE” – go ahead – read between the lines….and Cleveland’s Loretta Mester saying that the July rate hike had to be ‘at least equal to the June hike’…again – wake UP…read between the lines….I can’t wait to hear what GS and the others will now say….after the FED approves the narrative….
And then my good friend – Liz Ann Sonders – who I have tremendous respect for – nailed the coffin shut saying “the recession is sooner not later – the combination of a more aggressive fed and a recession are the KEY ingredients in the recipe to bringing inflation down” – Period the end! You know me – I am big on ‘recipes.
This morning US futures are down, the dollar is up, treasuries prices are down, and yields are up – as investors dissect yesterday’s CPI, prepare for today’s PPI along with the first set of earnings results led by the big banks and the big asset managers – JPM, C, BLK, MS, WFC, BAC, etc.…. Investors wrestling with the fact that the FED (will most likely) have to get even more aggressive to stop the bleeding….
The economic data today includes the usual suspects – Initial Jobless Claims and Continuing Claims – but the focus will be on the 8:30 am release of the Producer Price Index – PPI – because that reflects what is happening to prices at the ‘producer level’. By now, you realize that as prices rise there – they eventually rise at the consumer level. Today’s report is expected to rise by 0.8% m/m and 10.7% y/y – essentially in line with last month – which really means while it is not going up, it is not going down either so elevated prices are expected to remain high…. Capisce? But let us see how Press Secretary Karine Jean-Pierre handles this question….
As I pointed out in Tuesday’s blog – the market has sold off hard this year – a direct result of what the FED would do, how aggressive they would be, how long would it go on and what were the chances that they could maneuver a soft landing….…What stocks have not priced in yet are declining earnings estimates for the balance of this year and next along with weak forward guidance. So, brace yourself…. Just sayin’ – get ready for more potholes ahead.
European stocks are 1% lower across the zone…. after yesterday’s US data and all this does is raise the pressure on the ECB – European Central Bank and its President – Chrissy Lagarde…. remember – inflation across the eurozone is running at 9+% (historic highs) and she still has rates in negative territory at -0.25% – talk about tone deaf…. Hello? Knock, knock…. Wake up! Is anyone home?
The S&P closed at 3801 yesterday – smack in the middle of its trading range of 3759/3829 – leaving it down 21% ytd… Solidly in bear market territory. The action this morning is suggesting that we are on our way of testing the June lows of 3600…. (Recall on Tuesday I thought we would find support at 3760 and we did – at least for yesterday).
S&P futures at 5:30 am suggest that we will test 3760 on the opening at 9:30 BUT – today’s PPI report could change all of that. If it is in line with the expectation – we could see investors/traders and algo’s find relief…If it is ‘hotter” then watch out below and if it is ‘cooler’ then expect stocks to rally.
Earnings will begin sometime after 6 am……will they help to change the tone or not…remember – watch the guidance and in this case watch what the Loan Loss Reserves are doing…an increase in reserves will lower earnings and will suggest that the banks are expecting borrowers to fail….and that will tell you all you need to know….But remember – the big banks are relatively cheap…the XLF down 20% ytd….Recall the Bloomie’s analogy!
Stay focused…. continue to put money away in tax advantaged accounts….
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Potato’s & Eggs
Time for a time-honored favorite – real comfort food that won’t break the bank. – You can never go wrong with Potatoes & Eggs and you can eat for breakfast, lunch or dinner – Enjoy.
For this you need: Eggs, potatoes, garlic, onion, s&p, butter, olive oil, fresh grated Parmegiana Cheese and if you prefer a pinch of Italian seasoning.
Preheat the broiler (oven) to high.
Peel a couple of russet potatoes and then slice – now toss into a pot of boiling water – bring the pot back to a boil and blanch for 3 – 5 mins… Remove – strain and set aside.
In a large bowl – crack 6 to 8 eggs – Beat well – add a splash of whole milk (or 1/2 & 1/2), season with s&p (and if you like a pinch of the Italian seasoning). Add a handful of grated cheese. Mix well – set aside.
In a large oven safe frying pan – melt a dab of butter, add a squirt of olive oil and heat. Now add in chopped garlic and sauté. Next add some sliced onions and sauté – until soft and golden… add back the potatoes and brown on both sides.
Next – pour the egg mixture into the pan and allow to set. Twirl the pan to allow the egg to spread and cook. Once the edges begin to pull away – place the pan into the oven under the broiler…Watch as it quickly cooks the top of the “frittata”. Remove and slide onto a large serving platter – cut like a pizza.
Have toasted slices of Italian bread on the table for your guests to make a sandwich. Serve with Ice Cold whole milk.
This meal should cost you about $12 – $15
Buon Appetito.
