Things you need to know 

• Stocks rise as investors bet the FED will blink
• Fed’s Waller and Bullard say – ‘don’t bet the ranch’
• Oil – rebounded after the beating earlier in the week
• NFP today – but CPI and PPI are next week – they are more important
• Try the Arugula Pesto w/Toasted Garlic Bread.

 
It was a beautiful day in the neighborhood…. stocks rose (again)…. the Dow gained 345 pts or 1.12%, the S&P up 57 pts or 1.5%, the Nasdaq gained 260 pts or 2.3% the Russell added 42 pts or 2.4%, and the Transports rose by 258 pts or 1.9%.

Every sector – except Utilities participating….Energy – XLE gaining 3.6% the clear leader – after getting slammed earlier in the week (-11% on Tuesday) for what I think was huge pricing dislocation – brought on by a spike in worries over the depth and severity  of the coming recession…..XOM, CVX and OXY all up more than 3.5% while coal and natural gas stocks BTU and CRK were up more than 8%.

Consumer Discretionary – XLY gaining 2.6%, Tech – XLK up 2%, Communications – XLC + 1.6%, Financials – XLF +1.5%, Industrials – XLI +1.2%, while Consumer Staples, Healthcare, Basic Materials and Real Estate all added less than 1%.  And as noted – Utilities – XLU lost 0.1%.

Samsung reported strong earnings and that sent the Semiconductor names higher…. the SOXX etf which has suffered this year – down 34% rose by 4.9% taking names like NVDA up 4.8%, INTC +3%, AVGO + 3.3%, QCOM + 5.8% and AMD up 5.2%.

The Growth Trade – SPYG rose by 2%- leaving it down 24% ytd while the Value Trade – SPYV gained 1% leaving it down 11% ytd.

Economic data yesterday – revealed that Initial jobless claims rose (in what I think is insignificant 235k vs. last month’s 231k) yet – the media wasted no time in suggesting that as unemployment benefits rise it must mean that the growth in the labor market is slowing down – which then means that the FED may pause or blink (that’s a very premature reaction)…….

Ok – let’s not get crazy – Initial jobless claims are down significantly….last year at this time they were 360k, 2 years ago they were 1.3 million….so if you are going to say that a rise of 4k jobs in one week suggests a slowing of the labor market – go for it….I’m not in that camp…. But – the headline caused the algo’s to go into ‘buy’ mode and when you have a market that is a bit anxious, in an oversold position – with many asset managers on vacation – you can get that exaggerated reaction…..Now while most people expect the data to weaken and the economy to slow as the FED raises rates – we are not anywhere near that happening yet…..it’s coming, but this is not it…..

Recession – is it here or not?

10 Yr. Treasuries declined in price causing yields to pierce 3.007% again while the 2 yr. Treasury note rose to 3.039% in another clear sign that a recession is coming (note the inverted curve). Remember – when the yield curve inverts (for more than 1 day) history tells us that a recession is at least 16 months away…. OK – but the Atlanta Fed survey is telling us that we are in a recession now because we have 2 consecutive quarters of negative GDP – so I must ask – Which is it? 

Now based on what we are hearing out of the FED mouthpieces – we are not there yet…. Yesterday Fed Governor Chris Waller downplayed or rather outright dismissed the recession story calling for another 75-bps rate hike in July followed by a 50-bps hike in September.  Fellow Fed President Jimmy Bullard (along with a handful of others) – reiterated his call for that same move and that suggests that the thinking behind the iron curtain is that inflation is not peaking, nor has it peaked, and they are concerned.  In fact – the FOMC mins that were released on Wednesday supports this narrative as well.

Oil rebounded strongly trading up to $104.50/barrel and the dollar index – DXY continue to inch higher…. ending the day at $107.30.

But, in the end – it was a quiet day….as the market awaits today’s economic data – the non-Farm payroll report… and that is expected to show that we restored another 270k jobs…. leaving the unemployment rate at 3.6%.  Avg hourly earnings up 5% y/y and up 0.3% m/m.  Like I said yesterday – this report always was THE report to watch.  but for now – not so much….

No one is expecting today’s report to surprise in either direction….but I guess you could say that if the report is significantly weaker – that would further support the ‘recession story’ and give the FED some cover while if its significantly stronger – that would support the non-recession story causing the FED to reiterate their stance on the pace of coming rate increases.  In any event – I am not putting much stock into today’s eco data…. but I am paying close attention to next week’s CPI and PPI reports – because those will speak directly to the pace and rate of inflation and that will determine the FED’s next move.

Now – the CPI is expected to be up again – coming in at +1.1% m/m and +8.8% y/y vs. last months +1% and +8.6% respectively.  And the PPI that is estimated to be +0.8% m/m and +10.4% y/y (which would be down from last month’s 10.8%) – Now – these are both coming out 2 weeks ahead of the next FED meeting – so there will be plenty of time to discuss, dissect and digest the data allowing the FED to change the narrative if they think it needs to change.  So, pay attention to what the big banks say post the release of that data…. because you know that the FED uses them to ‘take the temperature’ of the investor community.

This morning – US futures are down, not up, not down again…. – the Dow down 65 pts, the S&P’s off by 13, the Nasdaq lower by 58 pts and the Russell off by 5 pts.  Oil is down 50 cts and 10 yr. treasury prices are up – sending the yield back below 3%.

European stocks are also lower…. with all the major markets across the zone down about 0.25%.  The focus for them will also be today’s US NFP report as well.

The S&P closed at 3902 up 57 pts…. leaving it solidly in the 3600/4000 trading range.  And while it feels good, we test lower again as we move through earnings – which starts next week.  If we start to see margin pressure that will cause investors to back off….so listen to the guidance, listen to what the C-suite has to say about what the future looks like.

Look Fed fund futures are pricing in a rate cut in 2023……something I do not see……. – JJ has told us that 2% is the TARGET (now he has said that before and completely ignored it) – so is it really 5%?  4%?  But until it is clear that the trend has changed, and inflation is dyeing – I do not see the cuts…. I mean there is a 6.8% difference between inflation and interest rates….so in my opinion – the FED still has work to do…. Recall that 40 years ago – when we were in the same situation – the FED jammed interest rates well above the rate of inflation in order to arrest it….so if that is the case – strap in….

Stay focused…. This is not the time to get rattled…. continue to put money away in tax advantaged accounts…. you can keep it in cash and be patient if that makes you comfortable or you can continue to put it to work…. but put it away.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Linguine w/Arugula Pesto (and toasted garlic bread)

Yes – Arugula….a twist on an old classic…. try it…. gives you a bit of a peppery taste – but in fact is delicious.

Start the same way you make Basil Pesto – Rinse the arugula, and pat dry…. let sit.  Heat up a sauté pan and toast the pignoli nuts – maybe 4 mins or so…. set aside.  Now in a food processor – add the Arugula, nuts, 2 cloves of garlic, a bit of salt – no pepper, and olive oil…. now puree…Don’t be afraid of adding too much oil….it will not be wasted at all….
Once pureed – add a couple of handfuls of grated Parmegiana Cheese and blend some more.  That is, it…you’re done.  Now set aside in a bowl and cover with saran wrap.

Bring a pot of salted water to a rolling boil and add the linguine.  You can use any type of pasta you like – but linguine makes a more traditional dish.  Cook the pasta for 8 mins or so – until aldente.  Now strain the pasta – reserving a mugful of the pasta water.

Return the pasta to the pot and add back about 1/4 cup of the water to re-moisten…. stir.  (Make sure there is not a puddle of water in the bottom of the pan….)  Now add about 4 tablespoons of the Arugula pesto and stir……coating the linguine well.   Now serve in warmed bowls and top with another dollop of the pesto.  Keep fresh grated cheese on the table for your guests.

Get a nice loaf of Italian bread and make toasted garlic bread to serve along side this dish.  Yum.

Buon Appetito.