Things you need to know –
– It’s a BIG week for eco data…Watch the CPI and PPI m/m numbers.
– Short Duration fixed income now yielding better than 4.5%
– Dollar index rises putting a bit of pressure on commodities.
– Mikey Wilson & Associates (MGS) reiterates his S&P 3000 call!
– Try the Rigatoni with Arugula and Cannelloni Beans
“The process of lowering inflation to the FED’s goal of 2% is likely to take quite a bit of time…..” JJ Powel – 2/7/2023
It was a bad week for stocks and bonds…..in fact, it was worse for bonds but either way it appears that investors are starting to realize that just maybe they got a bit ahead of the themselves…..pricing in a soft/flawless landing – where the FED manages to tamp down inflation with one more rate increase without triggering a recession….that was until we heard multiple times from multiple FED members that interest rates have to go above 5% – with some suggesting as high as 5.5% – 6% – and then stay there for what one FED head described as a ‘few years’ which means rates will go up more than just one more time. Traders have now upped the ante and are pricing in a terminal rate of 5.2% up from 4.9% last week. Many pointing to the very strong NFP report that hit the tape on February 3rd that revealed an unemployment rate of 3.4% and a gain in jobs of 517k – as the reasons that have caused the repricing of rates and risk. In the end, derivatives markets are starting to reflect that shift in expectations. Look – many analysts were (are) predicting a rate CUT this year and that is why they took stocks – especially the Nasdaq names higher…..– well, that looks increasingly unlikely right now, so be careful of just jumping on board…
Stocks traded all of the place during the week and again on Friday ending the day mixed but the week lower….. the Dow gained 170 pts or 0.5% but lost 0.1% for the week, the S&P added 9 pts or 0.2% but fell 1.1% for the week, the Nasdaq lost 70 pts or 0.6% and fell more than 2% for the week, the Russell gained 4 pts or 0.2% but lost 3% for the week, while the Transports gave back 25 pts or 0.1% and also lost 3% for the week.
And so, what is causing this shift? Well, we are about to find out this week….eco data this week includes the all-important January CPI (Consumer Price Index) read on Tuesday….and the m/m number is expected to RISE by +0.5% UP from last months’ -0.1% suggesting that inflation is turning higher and is more stubborn than many expect – that trending lower m/m number is about to start trending up again. The y/y number is still expected to move lower down 0.3% to 6.2% vs. last month’s 6.5%….but the focus will be squarely on the m/m number. And then on Thursday – we’ll get the PPI (Producer Price Index) and that is also expected to show a m/m read that is +0.4% up from last month’s -0.5% – a nearly 1full percentage move UP m/m…….Now the y/y number is also expected to decline to 5.4% down from 6.2% and again the focus will be on the m/m increase vs. the y/y decrease. Remember – they will try very hard to negate the m/m number and make you focus on the y/y number – saying something like – ‘it’s transitory’ and this is exactly what I have been concerned about…… In addition, we will get retail sales – expected to be better, Industrial Production – better, Capacity Utilization up, building permits up while housing starts and leading economic indicators are both expected to be down.
Now – all of this caused bond prices to decline and that has sent bond yields higher…..short duration bonds – 3 month, 6 month and 2 yr. bonds are yielding 4.6%, 4.7% and 4.5% respectively while 1 yr. bank CD rates are pushing 4.8%. Remember – the bonds offer a guarantee of principle backed by the full faith and credit of the US gov’t. while the CD is backed by the full faith and credit of the bank and that is causing some investors to consider ‘rebalancing/reallocating’ investment dollars….and that my friends will continue to cause angst for the stock market.
Oil – kissed $80/ barrel last week – after being talked down to $72 the week before….The rise or fall coming from that days China story – are the reopening or not? Will demand surge? What about the global economy – Are we entering a recession or not? And then we learned that Vlad is cutting production in response to international sanctions against his country for invading his neighbor and up they go… And while many expect oil prices to hit $100 this year, it is down 1.4% this morning at $78.60/barrel and you can credit the stronger dollar this morning for that move….
The dollar index (DXY) which had traded down to $101 and found support is now trading back at $103.70 as investor realize that rates are going higher in this country and that will cause the dollar to rise – putting some pressure on the commodity complex – as commodities are priced in dollars – so as the dollar rises – commodities typically pull back and as the dollar falls, commodities typically push up. The dollar index is now a hair above the trendline at $103.40 – so the question now is, will that become support or not? The next trendline that will offer resistance is up at $106.80. If it fails to hold the current level – then we could see it go back to $101 ish…but if the CPI and PPI reports raise the level of angst then I expect to see the dollar rally.
US futures are muted this morning as investors/traders/algo’s and ChatGPT get ready for an action packed week as the sun rises over the Atlantic….Dow futures -50, S&P’s down 1, the Nasdaq up 36 while the Russell is off 2. Longer term investors remaining long term bullish, but short term cautious as they reassess the disconnect between valuations vs. FED policy. And not to be left behind – the guys (which includes both men and women) at Morgan Stanley are reiterating that the US market is ‘ripe for a selloff’ after prematurely pricing in a pause/pivot by the FED. Mikey Wilson – the lead architect of this statement said it this way in his note
“While the recent move higher in front end rates is supportive of the notion that the FED may remain restrictive for longer than appreciated, the equity market is refusing to accept this reality.”
He and they continue to believe that deteriorating fundamentals coupled with ongoing rate hikes is about to drive equities to an ‘ultimate low this spring’ and recall – his ultimate low is S&P 3000 – and that would mean a 1000 pt move or 25% lower from here! ☹
The S&P closed the day at 4090 – up 9 pts but still below the 4100 century mark…..While we are still holding well above S&P 4000, I continue to think we will test it again in the next couple of weeks where I think it will hold…and if it doesn’t’, I suspect a test of the December lows would then become the target – 3850 ish….I do not see a Mikey Wilson type of move – but that is what makes a market….differing opinions. As a long term investor, I am happy to let names I like come to me….rather than chase them higher…. Large cap/mega cap multi-nationals that are good divvy payers come to mind…. In addition, mid cap and small cap sectors on a pullback are also an area of interest.
And after the 2nd, 3rd & 4th UFO’s were shot down over the weekend – I will continue to say that Aerospace and Defense is an area I like – and fyi – the group ITA is only up 3% ytd…..think GD, NOC, GQ, RTX & LMT.
Remember – build a strong foundation…. dollar cost average into it and keep reinvesting all the divvy’s is the plan…. Buy names on weakness (as long as the weakness is not a fundamental shift in the sector or the name).
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
The market commentary is the opinion of the author and is based on decades of industry and market experience. SlateStone has conducted reasonable due diligence on the contents, however, no guarantee is made or implied with respect to these opinions, and the information provided is subject to change without notice. This commentary is not intended to be relied upon as authoritative or as a recommendation or advice, nor should it be construed as an offer, or the solicitation of an offer, to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors. Please consult with your financial advisor for your specific situation.
Kace Capital Advisors is a paid promoter for SlateStone Wealth, please see further disclosure here and refer to SlateStone’s Form ADV for further disclosures and information about SlateStone Wealth
Rigatoni w/Arugula & Cannelloni Beans
This is a vegetarian dish that is easy and quick to make if you are not a vegetarian then feel free to add some Italian sweet sausage*.
Bring a large pot of salted water to a boil. Add the Rigatoni and cook until aldente – 8 / 10 mins.
In a sauté pan – heat up some olive oil, crushed garlic and a sliced/chopped “red” onion. Sauté until the onion is soft and translucent. Now add a can of cannelloni beans – juice and all and stir to heat up…about 4 mins or so. Now add the arugula and stir. Arugula will wilt – no worries. Drain the pasta – saving a mugful of the pasta water….return pasta to pot and add back 1/4 cup of the water to re-moisten. Next add beans and arugula – handful of Parmegiana cheese and toss. Serve immediately in warmed bowls with freshly toasted garlic bread.
*If you add the sausage – do it this way….grill the sausage…..remove and slice into bite size pieces….add to the sauté pan BEFORE you add the beans and arugula. Stir and cook for 3 mins or so….Then add beans etc….
Buon Appetito
