Things you need to know ~
- You Ain’t Seen Nothing Yet – Think BTO – 1974
- Fed speech was a word salad….
- Fed sees the terminal rate higher than previously thought
- Rates to rise by 50 or 75 bps in December
- Algo’s go into panic mode – sending stocks tumbling
- Try the Spaghetti Al’ Olio
Fed raises rates AND signals that there is more to come! He also delivered a speech that sounded disconnected – One sentence said one thing while the very next sentence said something completely different – or did it?
First he suggests that rates not only will rates rise by 75 bps yesterday, but that we can expect them to rise by 75 bps in December or maybe not. That he is prepared to push rates as high as necessary to tamp down inflation while also saying that
“the incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Does that mean that the terminal rate is now expected to go north of 5%? Say 5.25%? We won’t really know until ‘we get there’.
Recognizing that the US economy has shown remarkable resilience he then added that
“We think we have a ways to go, we have some ground to cover with interest rates BEFORE we get to that level of interest rates that we think is sufficiently restrictive. It is very premature to be thinking about pausing but it could be appropriate to slow the pace of increases as soon as the next meeting or the one after that.”
It is very premature to think about pausing….I think that was the line that sent the markets into a tailspin – it’s like that line late last year when he suggested that they weren’t ready to raise rates but would start thinking about thinking about raising them. But here is the rub – You see he left the door wide open and in the process left it confusing. The word ‘pause’ – what exactly did he mean?
Does it mean stop? Webster’s defines the word as ‘a temporary stop in the action; to interrupt the action.’ Is that what he meant when he used the word – pause? – Because if so, then he is actually correct – it IS too premature to think about ‘stopping the action’ –which is different than ‘slowing the pace of hikes’ which means they are still rising and ‘not pausing’. So, which was it? Because the algo’s heard one thing causing chaos in the final two hours.
Stocks which were slightly lower all day coming into the 2 pm announcement moved sharply higher into the start of the song……that 1974 song known to the Baby Boom Generation – made popular by none other than BTO (Bachman Turner Overdrive). In it JJ said that we met a devil woman and she took our hearts away. She said we had it coming, but we wanted it that way…and she looked at me with those big brown eyes and said – You Ain’t Seen Nothing Yet!”
You can find that song here: https://www.youtube.com/watch?v=uF6PsNOQK18
In the end – expect lots of dissection of his Kamala style – word salad speech from yesterday as markets try to figure it out. Expect analysts to argue both sides – I just laid it out….in the end it’s like saying maybe it will rain or maybe it won’t, or stocks can go up and stocks can go down….Yesterday the reaction was to shoot first and ask questions later.
By the time the 4 pm bell rang – we found blood on the streets – the Dow swung 924 pts from the 2:30 pm high to the 4 pm close – losing 505 pts or 1.5%, the S&P lost 96 pts or 2.5%. The Nasdaq got absolutely clobbered – losing 367 pts or 3.4%, the Russell got whacked – losing 62 pts or 3.4% while the Transports gave up 427 pts or 3.2%.
The Nasdaq is now down 33% ytd, the S&P down 22%, the Russell and Transports down 21% while the Dow Industrials are the outperformers – down only 12% ytd.
Every sector got whacked – unless you played it from the contra side –
Consumer Discretionary – XLY lost 3.8%, Tech – XLK lost 3.5%, Communications – XLC lost 2.8%, Basic Materials – XLB, Energy – XLE & Real Estate – XLRE falling 2.6%, Healthcare – XLV, Consumer Staples – XLP and Industrials – XLI down 1.7%, Financials – XLF lost 1.2% while Utilities – XLU offered some support losing just 1%.
Housing – XHB down 3.8%, Retails – XRT lost 4.2%, Disruptive Tech – ARKK lost 4.8%, Metals & Miners – XME lost 6%, Semi’s – SOXX lost 3.2%, the Airlines – JETS lost 2.9%, the Value Trade – SPYV lost 1.7% while the Growth Trade – SPYG gave up 3.3%.
The contra trades though, were the light in the storm….the DOG +1.6%, the PSQ +3.4%, the SH +2.5% and the VIXY (fear index) gained 2.7%.
In the end – while it was confusing for the algo’s – you have to ask – Did JJ really say anything that we didn’t expect? NO. He told us that they aren’t slowing down, he told us to prepare for higher rates, he told us that INFLATION remains directly in the bullseye and that they had no intention of stopping until they fix it….ALL things that we already knew….I guess what we don’t know yet is how the November eco data is going to present itself. If the CPI, PPI and PCE continue to surge higher then expect rates in December to rise by 75 bps, if by chance they turn lower – then 50 bps would be more appropriate- I am in the 75 bps camp right now, Just because I do not see how anyone expects inflation to subside in this month’s report. I hope I’m wrong – but I don’t think I am.
This morning we are seeing bond yields surge- the 2 yr. is up 11 bps now yielding 4.72%, the 5 yr. also up 10 bps yielding 4.4% and the 10 yr. is now pushing 4.20%. Think about it – you can tie up some money for 2 yrs. and guarantee yourself 4.7% – riskless, sleep at night…..and with so much uncertainty ahead both economic and political – you can expect that some money is going to the sidelines (it already has) and that will continue to put pressure on stocks. Look – Fed Fund Futures are still pricing in a 2 yr. peak at 5.06% – so if that’s the case – we still have 30 bps to go. If the 2 yr. goes to 5.06% – then expect the 10 yr. to be north of 4.5%. On a side note – mortgage rates ticked higher again yesterday and are now approaching 7.25% for conforming and near 8% for jumbo.
OIL rose by 1.1% or $1/ barrel yesterday to end the day at $89.35/barrel. This morning it is down slightly trading at $88.80/barrel.
The dollar index – DXY rose yesterday on the back of the FED decision and is higher again today….trading up $1.4 to $112.81. Expect the dollar to go even higher as the FED raises rates….and that is putting pressure on gold down $28 this morning at $1622/oz – leaving it sitting right on the year low….Failure to hold here will create another new 2022 low….
The mid-terms are only 5 days away – and it is getting uglier and uglier. Both sides fighting until the end to tell their story. Joey on the road, making obvious misstatements – makes it even more painful to watch. Democrats feeling the heat across the country as early voting and mail in ballot voting hits NEW HIGHS….so much for the argument that the GOP is trying to hinder early voting…..So stop that argument all while Press Secretary KJP tells the media that this is ‘the kind of economy that delivers for working families!’. Is someone kidding? Does the WH realize that she is singing that song? How exactly is this economy delivering for working families? Maybe Janet Yellen, Brian Deese or Jared Bernstein can chime in at any time. Thoughts?
Eco data today includes S&P US Services PMI – expectation of 46.6 (contractionary), S&P Composite PMI of 47.3 (contractionary), ISM Services PMI of 55.3 (expansionary and conflicting), Factory Orders of +0.3%, Durable Good EX Transports of -0.5%. In addition we will get the usual suspects – Initial Jobless Claims of 220k with Continuing Claims of 1.45 million.
US futures are a bit lower this morning….Dow futures are down 53 pts, S&P down 8 pts, the Nasdaq down 32 pts and the Russell is – 2 pts. In the end – I am not really sure that JJ said anything new. I heard more of the same that allows him to go either way….It was the algo’s and those FED Fund Futures Traders that priced in more dovish language causing the S&P to rally 11%, the Nasdaq to rally 9%, the Dow to rally 15% while the Russell rose 13% since mid-October…..My sense is that we could see those gains evaporate as we assess the latest commentary.
European stocks are lower this morning as they prepare for the BoE (Bank of England) 75 bps rate hike – a hike that would be the biggest hike in 33 yrs.…..….. at 6:30 am – markets across the region are down between 0.75% and 1.5%.
The S&P closed at 3759 – down 96 pts…..taking us once again down thru all trendline supports. Could we see us test the October lows (3790) again…possibly, but I think cooler heads will prevail and that investors will realize that JJ didn’t say anything new – that they allowed the algo’s to convince us that the tone would be more dovish than what we heard – which wasn’t that far off of what we knew…I mean let’s be honest – JJ said and I have been re-iterating that inflation is KEY and that the FED will not slow down until they see ‘significant declines in the rate of inflation’ which is currently running at 40 yr. highs at 8.3% and likely going higher next week when we get both the CPI and PPI.
Sit tight as a long-term investor – stick to the plan…. take advantage of dollar cost averaging (DCA) and dividend reinvestment programs. Move some money into that safe 2 yr. if it give you comfort. Overweight the big boring names and buy the stuff that people need (STPN). Consumer Staples, Utilities, Healthcare, Energy…. while underweighting (not eliminating) Tech, Basic Materials, and Communications right now.
Take Good care
Chief Market Strategist
kpolcari@slatestone.com
Spaghetti AL ‘Olio
For this you need: 1 lb. of Spaghetti, 5 big cloves of garlic – thinly sliced, plus 2 large cloves – whole, olive oil, fresh grated parmegiana cheese, toasted bread crumbs and if you like – some red pepper flakes.
Bring a pot of salted water to a rolling boil. Put the spaghetti in and let it cook for about 8 mins…
While this is happening….add enough olive oil to a lg sauté pan to cover the bottom and then some. Now add the sliced and whole garlic and sauté on med heat – do not burn the garlic…you want it ‘toasted’ really – nice and nutty brown….should not take any longer than it takes the pasta to cook. (Here is where you would add in the pepper flakes if you want)
Now remove the pasta and add directly to the sauté pan. Toss to coat.
Serve in warmed bowls. Top with a handful of the toasted bread crumbs and a healthy amount of cheese. Simple – yet so good.
Buon Appetito.
