Things you need to know –

–         Stocks continue to thrash around

–         PCE due out at 8:30 – Is the market prepared for it?

–         All the markets want is clarity….

–         Try the Shrimp Scampi

Stocks rallied on Thursday….after chomping around all day – traders and algo’s took it higher into the closing bell – the WSJ defining it as a ‘snapback’ – making the bet that today’s PCE report will be a non-event.  At 4 pm – the Dow gained 108 pts or 0.3%, the S&P up 22 pts or 0.5%, the Nasdaq added 85 pts or 0.7%, the Russell tacked on 14 pts or 0.7% while the Transports took center stage – rising by 155 pts or 1.1%.

Look – The market wants clarity…good or bad, it just clarity in order to calm the chaos….it is when things are unclear that investors, traders, algo’s and markets remain confused and anxious….sending stocks down the drain one day and then up the next – as if the prior day never happened.  And that is what we saw this week…..Tuesday sent stocks down the drain – Wednesday and Thursday saw market churn and then yesterday the indexes all move higher as if nothing happened…..and that was in the face of today’s PCE Deflator report….The Fed’s favored inflation gauge….and what was really  interesting about yesterday’s move is the fact that today’s report could surprise to the upside (which would not be good)  – just like the latest CPI and PPI and that would send markets tumbling again….or will it? 

Look – we also got the FOMC mins this week – there were a lot of words and lots of sentences – but what did it all say?  It said that the FED had no intention of halting rate increases at least until the June meeting and then they had no intention of cutting rates in late summer / early fall.  That seems quite clear to me and it should be clear to the markets – because it suggests that the FED is well aware of the challenges we face and so if we get a hot report – Does it really change the narrative?  Even if we get a slightly weaker report – you have to ask the same question – Does it change the narrative?  The answer is no, it does not.  Why?  Because the minutes made it clear, the commentary from different FED members has made it clear.  Comments by Goldman – telling us that ‘they’ expect at least 3 more 25 bp increases – made it clear….and I say that because – Goldman is the mouthpiece for leaking/confirming FED think to the community.   And last night – even JPM CEO Jamie Dimon chimed in – telling us that inflation remains an issue (we know that), that while the FED will pause, (we know that),  they will realize that the increases are not enough (we know that too) and that we should all expect to see a terminal rate of 6%…and bingo – we know that too!  Why do we know that?  Because 3 weeks ago – Cleveland Fed President Loretta Mester told you so (I pointed it out the day she said it)….in a casual comment – she tossed out a terminal rate in the 5.5% – 6% range…..it was very casual – the media poo pooed it, but it was now out in the GPS (Global Public Square). 

And now take note – 6% is now becoming the norm –  everyone is floating a possible 6% terminal rate….they want it to be part of the narrative so IF the FED  takes it there, no one will be surprised….and while I’d rather not see it go there, they are setting us up for it….and the market now knows that.  So, back to the question – Will a hotter PCE Deflator report today cause the markets to react like they did on Monday?  I say no, because the market is expecting it to be a bit hotter – could we see a decline – sure, but will we see a 2% or 3% decline like we did on Tuesday?  – Nah!  …….

And by the way –  just like they did with the CPI and PPI – there is a new sheriff in town – his name is ‘Super Core PCE’ – and that is when they strip out almost everything that contributes to inflation – Food, Energy & Housing……this way – they can tell us that inflation is coming under control….and that is a positive!  Voila~!  It’s like magic!

Many are now suggesting that the FED may have to redefine the level of inflation that they are comfortable with – remember – that level is now 2% and has been 2% for years….but as inflation remains stubborn and rate increases will take longer for it to slow the economy – No one should be surprised to see them redefine that rate to 3%….maybe more….You see – when inflation is running at 6% and the target is 2% – that a 4% differential, but when the target is 3% – and inflation is 6% – then suddenly it’s only a 3% differential…  It’s an IMPROVEMENT, right? Again – Voila! 

Now the PCE is expected to come in at +0.5% m/m – up from 0.1% last month and 5% y/y – flat with last month.  Now if you take the PCE CORE Deflator – that is when they take some components out – it is expected to be +0.4% (vs. +0.3% last month) and 4.3% y/y vs. 4.4% last month…..See how that’s improving just a bit….so then if you take PCE SUPER CORE Deflator it will be even better….now just like the CPI and PPI – they don’t publish that number – they create it after the report and then push it out to all the media sources ….trying to drive the conversation towards it….Just like they did when they introduced the ‘Super Core CPI’ – a measure I never heard of in 42 years that I have been in the business, a measure you won’t see published in the Bloomberg ECO Calendar function  ECO <GO>.  But I digress….

The other data points today include Personal Income and Personal Spending of +1% and +1.4% respectively.  – both UP substantially over last month.  New Home Sales m/m of +0.7% – down from last month’s 2.3% – I suspect that could be even lower….have you seen some of the latest housing data? Have you seen the latest mortgage rates?  And then we’ll get the U of Mich Sentiment Index of 66.4 – flat with last month, and 1 yr. inflation expectation of 4.2% – flat with last month. 

Yesterday’s winners included – Semi’s soared by 3.3% on the back of a great NVDA report that saw that stock rise by a whopping 14%!  – that helped Tech overall –  up 1.6%. AI + 2.4%, Cyber Security + 0.25%,   Energy + 1.5%, Healthcare +0.3%, Industrials + 0.5%, Real Estate +1% and Basic Materials +0.1%.   

Retail lost 0.7%, Disruptive Tech down 1.5% (that’s a different area of tech vs. regular tech…. it’s Disruptive Tech), Metal and Miners down 1%, Communications – 0.5%, Utilities – 0.5%,

Now what is interesting is that both the Growth trade – SPYG and the Value trade – SPYV are neck and neck…both up about 4.7% ytd….suggesting that investors are split on where to go…..will it be Value or Growth this year….Could it be both? Let’s see.

The bond market continues to also thrash around…..with the 10 yr. still cozying up to 4%, the 6 month and 1 yr. hovering around 5.1% while the 2 yr. and 3 month are both yielding ~  4.7%.

Oil  – as discussed traded down to $73.80 – on the inventory build worries, found support and bounced….this morning oil is trading at $75.80.  Pioneer Natural Resources (one of the US’s biggest Shale Drillers)  CEO Scotty Sheffield telling us that – he expects global oil prices to pierce $100 this year due to what?  Get ready….Rising Chinese demand AND lack of supply growth.  Telling us that ‘Chinese consumption is picking up significantly while supply growth is expected to be 400k bpd down from 600k bpd – resulting in lower productivity’. 

The Saudi’s and the UAE are the only 2 countries in the world that can ramp up production…..he goes onto say that ‘if the world reaches 102 million bpd of demand as many are forecasting – then we do not have the supply..’  And there you go again – Econ 101 – Supply and Demand.  I hope you didn’t skip that class….so much of what happens in the world revolves around Supply and Demand….this is not rocket science.

US futures this morning are lower…not dramatic but they are taking just a bit off the table ahead of the 8:30 am report. Dow futures down 190, S&P’s down 26, Nasdaq down 115 and the Russell if off by 12 – taking back all of the gains (and them some) achieved yesterday. You can feel the building tension……How will the algo’s respond to the headlines….because you know how quickly it can change…. So you ask, why did they take ‘em higher yesterday – It’s illogical and you would be right, which is why you need to eliminate the noise. I hope you didn’t chase anything…..

Stocks in Europe are mixed….UK and Spain higher, while France, Germany, Eurostoxx and Italy are a bit lower.  The German economy contracted by 0.4% vs. the expected -0.2%.  UK Consumers are apparently feeling a bit more optimistic while the French not so much.  Investors across the region are awaiting today’s US eco data…..to see if it changes anything….

The S&P  traded as high as 4028 and as low 3969 before settling up 22 pts to end the day at 4012…..once again regaining that key 4000 level that I identified to you a couple of weeks ago and again this week as it became clear that we were about to test it.    And test it we did….Tuesday’s meltdown took us down and thru it and we have been struggling ever since to take it back…….

It is now T – 2 hrs.….before we get the PCE deflator report –  Remember, the market wants clarity….will today’s report offer that or not?  In my mind – a report that is plus or minus 0.1% or 0.2% is a non-event….but a report that is more than a 0.3% deviation could cause a short term knee jerk reaction….before settling in.  Again – I am keeping S&P 4000 as the level to watch….  If the market opened right now – it would slice right through it….taking us back to the lows earlier in the week at 3976……so now, that is the question…if the report produces a negative knee jerk reaction – will it break the Wednesday low or not?  If it does, that will cause the algo’s to get even more aggressive to the sell side – as the buyside once again steps aside to wait…leaving a void in bids…causing the market to fall further – testing trendline supports at 3940 and then 3910. Is it possible – of course – but will it be an opportunity to pick up some solid names at lower prices?  Yup….  Remember the smart logic algo’s (that aren’t so smart) take ‘em down and then when the data is clarified – they take ‘em up (and vis versa)   But they always take them down harder than when they take them up.   This causes chaos, noise and mistrust for the very participants that the markets are supposed to benefit.  Learn to eliminate much of the noise – because, it’s just that – noise.  Now it is the weekend – and the week has been anxious….so if today’s data paints a worsening picture then I suspect it will be a Risk Off day….as we move into the weekend….

Next week is loaded with more macro data – so sit tight….Know what you own and why you own it….if the fundamentals have changed then reconsider the base case…Are they better? Buy more, Are they worse – let it go.  And if you’re nervous – put the cash portion into short duration treasuries that will help you sleep at night.  Don’t forget adding some of the contra trades to offer downside protection.  Remember – the market has never stopped going down while the FED is hiking….so expect more pressure on the markets until June (we discussed this) – but that doesn’t mean its going to collapse (necessarily) it just means we could see cheaper prices that will offer opportunity to the long term investor. I am not in the Morgan Stanly camp calling for a 26% decline, but would not be surprised to see us test the October lows of 3600….which would be a 10% move lower from here if the nervousness continues.

Take good care.

Chief Market Strategist
kpolcari@slatestone.com

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Shrimp Scampi

It is Friday in Lent – so it’s a fish dish….

This takes all of 12 mins to prepare and serve….an easy dish that appears harder than it is….

You need only a couple of things….1 lb. of large cleaned, deveined shrimp, butter, olive oil, garlic, lemon, white wine, chopped parsley, s&p….and a lb. of linguine….

Bring a pot of salted water to a rolling boil

In a sauté pan – melt butter and add a splash of olive oil, add crushed/sliced garlic……and sauté…. keep heat on med so that you do not burn the butter or garlic…. add the juice of one lemon, complement with some white wine…about 1/4 cup…in pan – and a wine glass full for you – turn heat up to high….

Add linguine to the pot of water.

Next add shrimp to the sauté pan, season with s&p, and sauté quickly until nice and pink on both sides…no more than 5 mins……strain pasta – reserving a mugful of water – add pasta to sauté pan – mix and serve…. You may need to add back a bit of the pasta water to keep moist -as the pasta sucks up the juice….  Serve in warmed bowls with fresh grated cheese at the table.

A side of garlic bread never hurts!

Buon Appetito