Things you need to know
- The FED makes it clear (I think…)
- 2% inflation is the target – Yeah…good luck with that
- Markets stabilize – futures are up
- BoJo is getting kicked out today…. What’s next for the UK?
- Try the Roasted Sea Bass
Let’s be clear…. all areas of the markets are screaming slowdown, the economic data is weakening, bond yields are inverting, and the FED minutes revealed that the committee sees ‘more restrictive’ policy ahead – agreeing to raise rates more aggressively and to levels that would be sure to slow growth as the inflation story worsens…. They see the return to 2% inflation as critical…. Ok – look inflation is running at nearly 9%…. getting us to 2% ain’t happening anytime soon – so sit back – the most infuriating part of this whole thing is that they weren’t focused on a 2% rate back in May 2021!
Stocks finished the day mixed – the Dow gained 70 pts or 0.2%, the S&P up 14 pts or 0.4%, the Nasdaq ahead by 40 pts or 0.3%, the Russell and Transports gave up ground losing 14 pts or 0.8% and 7 pts or 0.05% respectively.
Mortgage applications fell by 5.4% – this does make sense – mortgage rates have jumped recently – although have ticked slightly lower this week – and this is putting some new pressure on housing along with an economy that appears to be ‘slowing’. In addition, we are beginning to see homes sit on the market, people are not knocking the door down any longer to ‘buy it sight unseen’ and with rates up nearly 100% since the start of the year – the cost to carry that same house is now decidedly more expensive….so why is this a surprise? Just wait to see what happens to mortgage rates once the FED hikes again at the end of the month. I am still in the camp – that 6.5% will be the going rate by year end for 30 yr. conforming loans. Current rates for conforming loans are about 5.5%. And if you want a ‘jumbo’ loan – then you are already in the 6.5% range.
Other economic stats that rounded out the day –
S&P Services PMI and ISM Services PMI both came in a touch better than the expectations….at 52.7 and 55.3 – remaining north of the 50 line (neutral) leaving it in expansionary territory and that is a good sign. Why? Because as I have told you – the US economy is a 75% SERVICES economy….so anything that supports services PMI is bullish…. the JOLTS report – Job Openings and Labor Turnover Report continues to show that there are 11.2 million jobs that are UNFILLED –
But the one that everyone held their breath for was the FOMC (Federal Open Market Committee) minutes and they reflected what most of us already knew and that is:
That the FED sees ‘More Restrictive Rate Hikes’ if inflation persists….in the minutes we learned that the members of the committee solidified their resolve to continue to push rates up to tamp down inflation and keep it from becoming ‘entrenched’ in the US economy.
So, what does that mean? Well – at the very least we should be prepared for a 75-bps rate hike at the end of the month – even as JJ put a 100 bps move on the table after the June meeting……and while I think they should hike by 100 bps – I am no longer convinced that they are seriously entertaining that move. The minutes appear to be clear; the majority believes that it could be one of two choices 50 bps or 75 bps …. The Vegas bookies are leaning towards the 75-bps hike, but we still have 3 weeks to go and as we know – so much can change. We could find ourselves being surprised by a change of heart at the last minute – as we were in June when the ‘mood’ suddenly shifted and Minneapolis Fed President – Neely Khashkari ‘leaked’ the story to his former employer – Goldman – who then promptly ‘put out an SOS – where GS made it appear as if it was their opinion that the FED should consider (and needed to be) more aggressive and move rates by 75 bps and we know what happened next…. The FED hiked by 75 bps. I guess we must ask – which bank will ‘get the call’ this month? JPM? MS? C? Or is GS the go to?
The key part of the statement – in my view – was this
“Many participants judged that a significant risk now facing the committee was that elevated inflation could be entrenched if the public began to question the resolve of the committee. They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”
Question the resolve of the committee? Don’t be ridiculous – who would do that?
The futures market is now pricing in a 3.5% rate by December – that would be another 1.75% move between now and then….so figure it out….
Oil – is trying to nurse itself back to health after the beating it took on Tuesday because of the rising ‘global recession’ risks….…. Yesterday, the API (American Petroleum Institute) reported a rise of 3.8 million barrels of crude inventory while gasoline supplies fell by 1.8 million barrels. Today – we will get the results from the EIA (energy information admin) – what will they say? This morning we see oil trading at $98.90/barrel – below its intermediate trendline at $101.45 – which now represents resistance. Long term support is found at $87.60…. Hmmmm – how quickly things can change.
10 yr. Treasury yields have been all over the place recently as many question the resolve of the FED – Will they maintain the current course of rate hikes, or will they blink and back off at the first signs of a recession? One month ago – yields were kissing 3.4% and on Wednesday they were testing 2.79%…. a 20% swing in yields as the S&P fell by 12% during that same period… All because investors remain unclear about the policy path…. This morning we see yields at 2.97% as reality sets in suggesting that the FED is not gonna blink.
The dollar index – DXY remains at its recent high trading at $106.94 and that will continue to put pressure on a range of commodities. Expect the dollar to go higher as rates rise.
US futures this morning are all higher….Dow futures are up 115 pts, the S&P is up 14 pts, the Nasdaq is up 50 and the Russell is up 8 pts. Clarity from the Fed minutes is being credited for the move….Yes, higher rates or the suggestion of higher rates are not good for stocks (initially) as we have seen over the past 7 months….but investors have repriced stocks, multiples have come down, higher rates are mostly priced in. Growth stocks have become Value stocks. Investors are betting that the current course of FED policy is appropriate – the only thing that could change that is IF inflationary pressures do NOT subside and the FED is forced to become even more aggressive – but let’s see…..
The next CPI data set is due Wednesday – July 13th….and that is expected to see another increase in the rate of inflation – of course it does – the latest PPI report ticked at 10.8% and as we know- a higher PPI report converts into a higher CPI report – Capisce? The next PPI report is due next Thursday, and the estimates have NOT been published yet….so you know what that means???
Eco data today includes nothing that will move the markets but tomorrow we get the latest NFP (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. Now this report was always THE report to watch, but for now – not so much…. The reports to watch will be next week’s CPI and PPI reports.
European markets area all higher – investors there digesting the latest FED mins, and, in the UK, Prime Minister Bojo (Boris Johnson) is expected to resign at any moment – he has lost support – more than 50 people have resigned in the last week after a ‘string of scandals’ hit his administration. This is not new news – this has been building for weeks (if not months now). The ECB (European Central Bank) is also expected to publish the minutes of their last meeting later today. At 6 am – European markets are all higher by about 1.5%.
The S&P closed at 3845 up 14 pts…. leaving it solidly in the 3600/4000 trading range. I suspect that after yesterday’s FED minutes – investors are willing to bet that the FED is doing the right thing and while higher rates will continue to put a cap on advances in the near term – if we see inflation respond then investors will be more willing to jump back in….and take stocks higher. Remember- the market is a discounting mechanism……it is trading today at what it thinks will be the picture 6 months from now….
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
Roasted Sea Bass w/a Marsala Wine Sauce
Sea bass is a fish that you find in cold waters of the southern Atlantic/Pacific and other Southern Oceans (Indian). It feeds mostly on squid, shrimps, and other small fish and for itself is the delight of Whales, Elephant Seals and Octopus. It is a white flaky fish that is easy to prepare and can be combined with many ingredients to make the perfect presentation. Today’s meal is a roasted sea bass on a bed of Onions/Mushrooms in a Marsala Wine Sauce
You will need: 1 lb. of sea bass, olive oil, butter, onion, Marsala Wine, Fresh wild mushrooms, Chicken stock, s&p, and chopped parsley for color.
Prepare by chopping the onion, slicing the mushrooms, and chopping the parsley. Have all other ingredients out on the counter to ease the process of creating this dish…
Preheat the oven to 450 degrees – Do not put the fish in the oven until it has pre-heated to the proper temperature.
In a sauté pan – heat the olive oil and the chopped onion – cook until soft and translucent. Turn the heat to high to make the pan really hot – then remove the pan from heat and deglaze with 1/4 cup or so of Marsala Wine – you can use White wine if you prefer – but you will get a different flavor – just fyi. (I say remove the pan from the heat because if you use Marsala, the flame can easily ignite the wine and singe your face – reg white wine – no worries) When the wine has cooked off add the sliced mushrooms and about a tblsp of butter. Reduce heat to med and cook until tender.
Now add the chicken stock – maybe 1/2 cup or so… and s&p… let it cool down… just so it thickens a bit…
In another sauté pan heat up a bit more olive oil…season the sea bass with s&p and add to the pan skin side down for about 5 mins… you want the skin to be crispy… flip and cook for about 1 min – transfer to a baking dish and put in the pre-heated oven and roast for another 4 / 5 mins.
Warm the serving dishes and place a bed of the onion/mushroom mixture on the plate and then top with the pan roasted filet. Adorn with a bit of chopped parsley. You can serve this dish with herb/garlic wild rice and sautéed green beans. Complement with a chilled bottle of my favorite – Pinot Grigio Santa Margherita.
Light the candles, turn down the lights… and you are off to the races… like putty in your hands.
Buon Appetito.
