NFP Smashed the Estimate, FED Puts 75 bps Back on the Table – Try the Chicken Thighs w/Pancetta

Kenny PolcariUncategorized

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Things you need to know 

  • NFP report surprised everyone!
  • 75 bps hike is BACK on the table for September
  • Oil continues to trade around the trendline – but will it hold?
  • China taunts Taiwan and the Senate passes a huge spending bill
  • Try the Chicken thighs w/Pancetta, tomatoes and Balsamic Vinegar

The US economy added 528k jobs on Friday – more than double the expectation – surprising nearly everyone, including the WH Press Secretary KJP (Karine Jean-Pierre).  The report showed that the labor market is NOT cooling at all….and puts payrolls at their pre-pandemic level.  Unemployment – fell to 3.5%, remaining at historic lows.  Avg hourly earnings m/m and y/y also rose more than expected rising by 0.5% and 5.2% respectively and that will continue to fuel the wage/price spiral inflation conditions that exist.  Labor force participation fell to 62.1% and this is a metric that you should make sure you understand.

The Labor Force Participation rate measures the percentage of the working age population who have a job or are actively looking for one, while the unemployment rate measures the percentage of people within the labor force that are without a job….in 2000 – the labor force participation rate was 67.3% and the unemployment rate was 4%.  Friday’s data has the participation rate at 62.1% and the unemployment rate at 3.5%.  Economists suggest that the loss of participation during this decade is a result of the baby boom generation hitting retirement age along with lower skilled workers losing their jobs due to outsourcing and automation…. Friday’s decline was seen as a loss of younger workers 19 – 24 yrs. old choosing not to work.

Now the unemployment rate only considers those in the labor force not differentiating between full time or part time workers.  If you have a job – FT or PT – you are considered employed. (Friday’s report showed that there were 384k part time jobs created – jobs that are paid hourly with no benefits – health or retirement).  The unemployment rate of 3.5% means that 3.5 people out of 100 people in the labor force are without jobs…it does not consider unemployed workers who have given up looking for a job (thus are not counted).

So, the jobs report is the exact opposite of what you think of as a slowing economy and all that means is that we have to reconsider putting a 75 bps rate hike back on the table for September and the idea that rate CUTS are coming in the new year ain’t happening…..…..which then raises the question whether investors will continue to pay up for stocks in the weeks ahead or have then once again gotten a bit ahead of themselves?

By the end of the day on Friday – the Dow gained 77 pts, the S&P lost 7, the Nasdaq lost 64, the Russell added 16 pts and the Transports added 122 pts.  The treasury curve remains inverted with the 2’s yielding 3.22% – much more than the 5’s at 2.94% and 10’s at 2.81%…and that is always a signal of a ‘coming’ recession…… On Friday – Cleveland Fed President Loretta Mester had this to say about the yield curve.   

“I don’t think that the yield curve, which actually inverts/flattens going into EVERY recession in modern history (1979, 81, 90, 2000, 08 and 19) is a good predictor of where the economy is headed”.

Which just means that they are trying to change the narrative again…..suddenly – an inverted yield curve doesn’t tell us anything at all….which is comical since it told us everything every time it happened in the past – much like a recession – which has a very clear definition – one that was used for decades –  until it wasn’t….And look at this…..NPR reported that Wikipedia had to ‘freeze edits’ to its page that defines what a recession is because so many people were apparently trying to ‘re-define it’ so that it fits the current narrative.

You can find the link here:

https://www.npr.org/2022/07/29/1114599942/wikipedia-recession-edits

but if you just want the meat of the article – here it is

“Wikipedia has frozen edits to its page for “recession,” halting a frenzy of changes to the entry after the Biden administration insisted that the U.S. economy has not entered an economic downturn.” 

Which essentially means that they were trying to change the definition on the Wikipedia page – now the question is – who exactly was trying to ‘edit’ the definition?

The freeze ended on August 3rd, Ok – today is August 8th…. I wonder what happens now – will we get that new definition of a what a recession is or won’t we?  And I wonder what they are going to do about the Yield Curve Inversion Page……!

Next up – corporate earnings…..as you know we are winding down this season – and so far the current set of earnings have been mostly in line with expectations – helping to stabilize the markets….…but forward guidance has been cautious and that is going to cause analysts to have to revise (downward) estimates for the 3rd and 4th quarters…..and it appears like they are doing that at a faster than usual pace – which just means that we need to brace for more chop ahead as estimates get reset and then investors reprice stocks based on those new estimates and the state of the economy.   3rd quarter estimates already have fallen by 2.5% according to FactSet and it was only July……just wait until we get into September – analysts always get busier slashing expectations just ahead of the reporting season that begins in early October to make sure that they cut them enough so that they ‘beat the expectations. 

The S&P is now trading at 18 x’s expected earnings…..(4145/$230 = 18) and that is up from 15.5 x’s that we saw in June…..when the S&P was trading at 3625…..If analysts cut 3rd and 4th qtr. estimates then the yr. end target has to change…..which will cause valuations to change and that will cause you to ask – What are investors  willing to pay for earnings in a rising rate environment?  Is it still 18x’s or does it revert to the 10 yr. average of 14.7% and if that’s the case then at the current rate – the S&P should end the year at 3,380!  So much will depend on what the FED does, the pace at which they do it….so sit tight…. the story is far from over.  Recall – our friends at GS think that we could test S&P 3100 before we find a bottom….and that represents a drop of 25% from here!

Oil ended the week at $89/barrel after testing as low as $87……piercing its long term trendline at $88.88… a level I pointed out would be key to the next longer-term move.  If oil can’t take back the trendline then the expectation is that it will test lower still…. think $80/$85 range. This morning oil is up 20 cts at $89.20/barrel just enough to hold the line – but is not up with any conviction and talk of a bigger economic slowdown will surely send oil lower…. Which is a double-edged sword – lower prices are good, but are they lower because of demand destruction and a recession or are they lower because of more production and supply?  Hint – it is not option 2.

And China kept the heat on Taiwan.  Beijing has also cut off products marked with “Made in Taiwan” or “Made in R.O.C.”  as well as cutting off contacts with the US on vital military issues and climate cooperation all while launching missiles aimed at Taiwan (while conveniently missing the island).

And all this is doing is raising the temperature in the room.  Now, I know you say that she has every right to go, blah, blah, blah, but I would ask – What did she or the trip accomplish?  She confirmed that ‘we (the US) stand with Taiwan’ – Great…that’s not new information…. but what did she mean, really?  Are we going to war with China when Xi Xi makes his move?  Is that what she meant?  All while the WH and Pentagon spokesman John Kirby reminded us that we respect the One China policy and that we do NOT support an independent Taiwan? So, what did she mean? 

Remember – the geo-political drama won’t price stocks in the long term, it will create confusion and chaos in the short term and until it simmers down – it can boil over.

Gold – which traded up to and through trendline resistance ($1807) last week – failed to hold ending the week at $1790/oz….  this morning it is down $2.80 at $1788……. this after the strong NFP report eased recession worries, raising the prospect of more rate hikes to tamp down inflation.  And if inflation subsides, then gold becomes less attractive, but if it doesn’t subside, then gold becomes more interesting.  In addition, talk of China NOT being even more aggressive in its response to the Pelosi visit is helping to ease the move.  You know how I feel, I think gold is poised to go higher – and we’ll get more information this week when we get the CPI and PPI reports.  For now, it remains in the $1780/$1811 trading range.

Dow futures were lower overnight but have now turned higher…. The Dow +60 pts, the S&P’s +8, the Nasdaq +40 and the Russell is up 4.  Investors had the weekend to consider what the FED will do next – post Friday’s NFP report – which should make some people reconsider the state of the economy.  The job market is strong, and that lowers the expectation that a recession is upon us, so the sense is that another aggressive rate hike in September is squarely back on the table.

Economic data today includes nothing…. Later in the week – we will get the CPI, PPI, consumer sentiment and 2 FED speeches – Minneapolis’s Neely Kashkari and Chicago’s Chucky Evans – both non-voting members on the FOMC – but will surely have lots to say.  Stick close….

This morning we get earnings from Dominion Resources, Palantir & Tyson Foods & AIG.  We will get more as the week progresses – but we have now heard from 430 of the S&P 500 names -so the bulk of it is done and we know how the story will play out.  77% of reports beat on the bottom line, while 70% beat on the top line….and that is being viewed as ‘ok’ considering what many expected going into it…. but stay close – the 3rd qtr. revisions have only just begun.

European markets are all higher – up by about 0.5% – 0.8% across the board.

Yesterday, the Senate voted to pass the ‘Inflation Reduction Bill’ – Kamala had to cast the deciding vote and boom…. it’s done.  The bill is the latest TAX, Climate and Health Care Bill that is supposed to reduce the deficit 10 yrs. out.

It promises to allow the gov’t to negotiate lower drug prices on 20 meds for Medicare beginning in 2026 and then again in 2029 – great….and that means that drug prices for the rest of us will only go up to in 2023 to offset the expected losses at the Medicare level in 2026.

It also means more IRS agents – the bill provided $80 billion to the agency and that means get ready for more audits as these new agents will be tasked with coming after you to find out that you took a questionable deduction and slam you with fines, and fees. The Dem’s say, ‘oh no, they are going after the big boys, not the middle class, no need to worry….’ I say – Now that’s comical….

The S&P closed at 4,145 after testing a low of 4,107 and a high of 4,151.  Wednesday and Thursday will be the days to watch…. Wednesday brings us the July CPI report which is expected to be a bit lower on the core number but higher when you remove food and energy y/y.  PPI is on Thursday and that is also expected to be a bit lower but still elevated at 10.4% y/y.

Last week’s strong NFP report coupled with higher wages puts the FED in an awkward position about what to do with rates and the messages being delivered by many of the FED heads remains confused….The FED’s  Jackson Hole Boondoggle takes place at the end of the month – so expect the speculation to be all about what JJ might say that is different than what we know already.  And then we hit the September/October time frame…. which is typically a tougher time for the markets.  While I remain bullish on the broader market going into year end, I remain cautious over the next 2 months….and all that means is – opportunity ahead!
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Chicken Thighs w/Pancetta, Tomatoes and Balsamic Vinegar

For this you need:  Olive Oil, Diced Pancetta (Or Bacon), 8 Medium Sized Skinless Chicken Thighs, Onion, Diced, Garlic Cloves, Peeled & Minced, Dry Red Wine, 1 Can Diced Tomatoes, Tomato Paste, Water, Chopped Rosemary, Chopped Thyme, S&P, Red Hot Pepper Flakes (Optional), Balsamic Vinegar, Chopped Fresh Parsley.

In a large heavy skillet, heat the oil over medium heat and cook the pancetta until cooked through and lightly browned, about 5 minutes. Remove the pancetta to a plate, set aside, and brown the thighs well on all sides, about 10 minutes. Remove the chicken to the plate and cook the onions until translucent and soft, stirring often, about 5 minutes.

Add the garlic and sauté for 3 mins or so, Add the wine, (about ½ cup) increase heat to medium high heat, and cook just until the wine is reduced by half.

Now add the tomatoes, tomato paste, water, rosemary, thyme, salt, pepper, and red pepper flakes if you are using.
Bring to a boil, then reduce to a simmer and return the chicken and pancetta to the pot. Cover the pan, and simmer for 20 mins, or until the sauce has thickened, adding additional water as needed if the sauce thickens too much.

Taste and adjust s&p as needed. Now stir in about 1 tblsp of balsamic vinegar – mix well and place the chicken on a platter.

Top with the sauce, then sprinkle with the chopped fresh parsley.

Buon Appetito.