Things you need to know –

–        Raquel Welch passes away at 84….…..Remember, when she was 30, I was 10!  Do I need to say more?

–        Retail Sales surprise to the upside – but is it what it appears?

–        PPI due out today….Will that mimic the CPI?

–        Try the Rigatoni Alla Vodka

Great retail sales report, rates go UP and the Nasdaq is the winner on the day? Oh boy….

The consumer is alive and well…..Retail Sales (seasonally adjusted)– which were expected to come in at +2% came in at +3%, and EX Autos and Gas it was even more dramatic….+2.6% vs. the expected +0.9%.…Now these were the largest monthly gains in more than 2 years suggesting that the economy is just fine and the consumer is not tired yet….spending more money on food, vehicles, furniture, clothing, healthcare and utilities…….And that is the key….Yes, the number is up on a first glance basis – but is it really up if you adjust for inflation?  Yes, consumers spent MORE money on all of those things, but did they buy MORE of those things or less?  Is the cost of living so high that we spent more money just to stay in the same place?  And that my friends are the question to ask….

You see rising prices push UP sales figures (because you spend more but buy less) – they are not adjusted for inflation, so you have to ask – Is the 3% jump as strong as it appears?  In addition – many analysts said that the rise of holiday ‘gift cards’ is another reason for the stronger numbers….Why, because the commerce dept does NOT include those purchases as spending when you buy them, they include it when someone redeems the gift card – so anyone that got a gift card in December spent it in January – so the ‘sale’ is counted in the January numbers and not the December numbers….recall how the December report was weaker than expected – causing analysts to suggest that the consumer was tapped out….

In any event –  I would say the number is not what it appeared to be, but Joey would disagree – telling us that it’s all good….never mind that the y/y cost of food is +11%, Electricity is +11.9%, Airline tickets +26%, Butter +40%, Eggs +60%, Beef up 20%, and the list goes on….Joey telling us – “Be creative!”  Skip one meal or buy generic food vs. brand names…..to help save you money.

In addition we got a weaker Industrial Production number, a weaker Capacity Utilization number and a better Empire State Manufacturing number.  So, it’s a mixed bag of data….And then the Atlanta Fed raised their estimate of 1 Qtr. GDP – taking it to +2.4% up from +2.2% – all because of the strong Retails Sales report….

So what does this all mean for the FED and future monetary policy? Will it change the narrative or not?  And as you can imagine there are a range of views out there…. Is it the soft landing that we all hoped for or is it all about to fall off the edge?   You have some analysts telling us that the strong retail sales report coupled with the strong jobs report is a “Goldilocks’ economy….not to hot, not too cold, but just right…..where the economy is strong and inflation is declining….while others think that its all smoke and mirrors and that the recession – predicted by the inverted yield curve – is still coming….and remember – once the curve inverts – which was April of last year – we are told it usually ignites a recession some 12 – 16 months later….well guess what?   That means it would happen sometime between April – July of 2023…and for those that tell you that ‘this time it’s different’, I would say, not so fast…..rates are currently 4.5% – 4.75% – and going to at least 5.25% – 5.5% – up (at least ) another 75 bps over the next 3 meetings….before they even consider pausing…In addition – we have heard layoff announcements with almost every earnings report and when those people apply for unemployment benefits we will see the unemployment rate start to tick higher….and let’s not forget about the balance sheet reduction- something that has not been talked about for months now –

In any event – investors continue to pick and choose what they want to focus on, on what day and what that then means for the FED.  The retail sales news initially sent stocks lower (think aggressive FED) – testing 4100 on the S&P before finding some support and after investors got a chance to digest the data (think less aggressive FED) ….and the final call was that the strong retails sales data may not be as strong as the headline number suggests so that must mean that the FED will change the narrative and that sent the algo’s into overdrive taking the indexes from negative to positive. By the end of the day – the Dow gained 40 pts, the S&P gained 11, the Nasdaq added 110, the Russell gained 22 and the Transports added 48 pts.

And like I said – rates went UP on the back of that strong report – and stocks went up – which continues to be a bit counter intuitive…..  The 3-month T bill now yielding 4.62%, the 6 month yielding 4.8% while the 2 yr. yield jumped to 4.63% up from 4.6%….all while the Nasdaq gained 1% – taking it up 15.3% ytd…..which is the real head scratcher…- but maybe it’s because they all got slammed last year and this is just the bounce back as many analysts try to sell the dovish FED narrative vs. the hawkish narrative that the FED is selling…. And in what is also a head scratcher – a Goldman benchmark of UNPROFITABLE tech companies rose by 4% yesterday taking that index up 30% this year.  They keep the components a secret – so you have to call Davey Solomon to find out what’s in it…. But does that smell of stink to anyone?  It’s a benchmark of UNPROFITABLE tech companies, not profitable ones…..(It’s called the GS Non Profitable Tech Index) the ticker on BB is GSXUNPTC.   

Today brings us the all-important PPI number – inflation at the producer level and that too is expected to be up m/m but down y/y – just like the CPI was supposed to be….Top line PPI demand at +0.4% up from -0.5% last month, y/y at +5.4% down from 6.2% last month.  The PPI Ex food and energy up +0.3% m/m and down to 4.9% y/y….Now remember that the CPI was stronger in the y/y numbers – something that caught the markets by surprise – so expect investors to be looking for that in the PPI number….also – I wonder if we will start to hear about the Super Core PPI number – which – like the Super Core CPI number just eliminates sectors of the economy that economists ‘think’ disrupt the picture too much….in order to give them the result that want (and need) to support their narrative in the event that the report is ‘hotter’ than what they want.  I pointed this out in yesterday’s note and if missed it – here it is –

Unlike Core Inflation – Super-Core Inflation does NOT have a specific definition – it is a term that expresses price measures that EXCLUDES sectors that economists ‘FEEL’ distort the broader inflation figure.  Apparently the Super-Core figure is CPI EX Food and Energy (core) MINUS housing….and when you strip that out – the Super-Core rate only rose by 0.3%…. – well of course it did – you are eliminating parts of the equation….

So let’s see if they have to come up with a Super Core PPI read as well – that will be very revealing….We are also due to get Housing Starts m/m down 2%, Building Permits m/m up 1%, the Philly Fed Survey of -7.5 and NY Fed Services Business Activity of -17.

Oil – continues to churn right here in the $78 range…..The IEA (Int’l Energy Admin) telling us that crude stockpiles rose to the highest level since 2021 – but they are quick to point out that the rise was due to a ‘data adjustment’ rather than demand destruction…..which is why you didn’t see oil decline very much at all….(think smoke and mirrors)…..Remember – the Russian’s are cutting production by 500k bpd and the strong China re-opening is only adding to the demand story……Understand that China is supposed to account for 50% of global oil demand growth in 2023 – and this will keep a floor under oil pushing it even higher in the months ahead.

Oil is now in a tight band….Support is at $77.40 while resistance is at $79.50….this morning it is trading at $78.80….a push up and thru resistance will see it pop to $85 in a hot minute….

The dollar index (DXY) is holding steady at $103.75…..above the trendline at $103.40 and the recent move up suggest higher rates are coming….Let’s see what the PPI tells us today.  

US futures are down this morning as investors/traders/algo’s continue to digest the latest report….Dow futures -20, S&P’s -15, the Nasdaq down 6 while the Russell is down 2.   We await today’s data. 

European markets are up by about 0.5% across the board.  France making all time highs as that market is up 14% ytd…..Analysts telling us it is because of the renewed strength in ‘luxury names’ (think LVMH +22% ytd and Pernod Ricard +9% ytd).  

The S&P closed the day at 4147 – up 11 pts. Again –   We remain in the broader 4000/4200 range….and the longer we remain above 4100, the more 4000 becomes significant support in the event of a pullback…. I think 4200 will remain difficult for the markets to pierce in the short term as we digest the data and the FED narrative of higher for longer.  The jury is still out on the landing….Will it be hard, soft or just LONG….will it be death by 1000 cuts? 

I continue to think we will test 4000 again in the next couple of weeks and I think it holds.   As a long-term investor, I am happy to let names I like come to me…. rather than chase them higher…. I continue to favor the STPN (Stuff that People Need) as the overweight with Aerospace/Defense, AI, Cybersecurity and SMID’s (small and Mid-Cap) as complements.   

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.

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Rigatoni alla Vodka

I love this dish… easy to make and is usually a fan favorite. Works great as a starter dish for a nice dinner party.

For this you need: 1 lb. of Rigatoni, 2 garlic cloves – chopped, butter, olive oil, diced prosciutto, heavy cream (room temp), your favorite vodka (Tito’s works well), shredded fresh parmigiana cheese, s&p and 1 can of crushed tomatoes.

Begin by bringing a pot of salted water to a rolling boil

In a deep pan – melt half a stick of butter and add a splash of olive oil, add the chopped garlic and the diced prosciutto. Sauté for 3 or 4 mins. Now add the can of crushed tomatoes (not puree), about 1 quarter cup of vodka, s&p. Bring to a boil and then turn to simmer and cook for 15-20 mins. Turn off the heat.  Add in the heavy cream and mix well.

Add pasta to the pot and cook for about 8 mins or until aldente.

Drain the pasta – keeping a mugful of the water.  Add pasta to the sauce – toss in the shredded parmigiana and mix

Buon Appetito