Things you need to know –
– Conflicting comments from FED Heads ignite a rally.
– Were the comments really dovish?
– Is the FED confused?
– Oil – pushes higher, Exports to China and Europe at record levels
– Gold rallies, dollar retreats – a bit.
– Treasury yields surge…10 yr. at 4+%
– Try the Arctic Char
I was on with Charles Payne yesterday…. Here is the link.
https://video.foxbusiness.com/v/6321573951112#sp=show-clips
Two FED members – speak out of both ends, causing some confusion but igniting a rally – but did they really say anything new? Was the commentary dovish?
Fed Governor Chris Waller (a voting member) told us that if payroll (NFP report due out next Friday) and inflation data (CPI & PPI on the 14th & 15th) cool after their ‘hot prints’ in January then he would endorse ‘raising the target range for FED funds a couple more times to a projected terminal rate of 5.1%-5.4%’
5.1% – 5.4% is actually BELOW what the market was being primed to expect – recall – that we have been tossing around the 5.5% – 6% range after the ‘hot’ January data….so a range of 5.1% – 5.4% appears to be more ‘dovish’.
Then in nearly the same sentence he went onto say “On the other hand, if those data points continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released”.
Which is a direct contradiction to his prior statement just moments before…now suggesting a 5.5% – 6% target range…
And then we had
Atlanta FED President Raffi Bostic (a non-voting member) also make contradictory comments saying
– “the FED could be in a position to pause rate hikes sometime this summer”
But ‘I want to be completely clear: There is a case to be made that we need to go higher.”
WOW!!! Are you kidding me….Bostic – who is NOT a voting member – also made the case for a dovish interpretation.
Someone tell me please what that was all about? Are you trying to tell me that stocks shot higher on THOSE headlines? What about that was news? What about that is any different than what we have all been talking about. Those concerns are not new….and the terminal rate conversations are already somewhere between 5% – 6%…….What was new was the idea that both of these FED heads appeared to be a bit more dovish – and the algo’s seized on it…..suggesting that the 5.5% – 6% chatter is just that – chatter….Which I would argue is incorrect….because I still expect the data to come in stronger and that will force the FED to reconsider the increment of the rate hikes in both the May and June meetings. (I am in the 5.5% – 6% terminal range) Recall that after the hot January data – they started throwing out a 50 bp move in March….vs. the expected 25 bp move….which was right around February 16th….the day stocks started their latest pullback…falling from 4130 ish to yesterday’s low of 3928.
Now I expect that the FED will move rates by 25 bps on March 22nd….unless the CPI and PPI data is even ‘hotter’ again for the month of February….but to change the narrative and the rate hike just one week before the FED meeting would be like screaming ‘FIRE’ in a crowded theater….It won’t be pretty at all….it will wreak of desperation….and loss of control….which I might argue has already happened. In any event – it just details how anxious the market is….
By the end of the day the Dow gained 340 pts or 1%, the S&P up 30 pts or 0.8%, the Nasdaq up 84 pts or 0.7%, the Russell up 4 pts or 0.2% while the Transports did it again…gaining 275 pts or 1.9%!
So here is what happened….those ‘smart logic algo’s’ are at it again…you see, they scrape the headlines and they interpret the language as ‘DOVISH’ going so far as causing some people to suggest that the subliminal message is that the FED will not only pause, but (ready….) pivot. It ignites the buy side algo’s causing them to trip over each other as they try to ‘buy’ stocks….while at the same time – they cancel the offerings on the sell side – leaving a void in ‘supply’ forcing the automated buy orders to scramble…Just the opposite of what saw happen in mid-February – when the data (strong) and some FED commentary (hawkish) caused the algo’s to have the opposite reaction…. Initiate sell orders, cancel inline buyside interest leaving a void in ‘demand’ sending stocks lower…
Additionally – you can argue that some of it was driven by the technicals…You see stocks began the day weaker….breaking the one trendline support at 3940 only to test the next trendline support at 3923 ish….which is a level that we have identified as a place where stocks might find support….and they did….
and then like clockwork – both Waller and Bostic (almost on cue) make these statements – that were by no means a blockbuster – and the algo’s go crazy….bouncing off of the 3923 line – boomeranging through the 3940 trendline (which you could argue represented resistance) only emboldening the momentum sending the algo’s into overdrive – piercing resistance at 3983 only to see stocks trade up to S&P 3990 before taking a break….. It’s all very orchestrated (would love to see their trading accounts) – but in the end – what did we learn that was really new? Nothing.
10 yr. treasuries pierced 4% to end the day yielding 4.05%, the 6 month T-bill is still yielding better than 5% beating the S&P’s earnings yield at 4.74%…Even the 2 yr. at 4.86% is beating the S&P’s yield and if rates continue to rise – expect that ‘inversion’ to get wider as well….30 yr. conforming mortgage rates are now 7.05%.
The FED Fund Futures market is now pricing in a peak of 5.4% by June- let’s see what happens today after the markets have had a chance to digest the yesterday’s mixed commentary. Remember, the majority of FED members have been and remain hawkish…with many still hinting of a terminal rate with a 6 handle on it.
Oil – which was trading at $76.50 on Monday traded up to $78.80 yesterday on that recovering China Story- is trading at $78.15 this morning. Manufacturing activity in China grew at the fastest pace in more than 10 yrs. – suggesting that the rebound in China is real and that energy demand is not going away anytime soon. Russia is sending record amounts of oil to China and the US is sending record amounts to Europe – so, anyone that thinks demand is waning needs to see a shrink. We are now between 2 trendlines….$77.90/$79. A push up and through $79 will see it test resistance at $83.15. Remember – oil analysts are calling for $100 oil by summer.
Gold has rallied back nicely after testing near $1800/oz on the stronger dollar last week. We are now smack in the middle of the range….$1800/$1900 at $1850…up $11 today….It was down yesterday on a stronger dollar….but remember we discussed the gold/dollar relationship….and pointed out that if the Dollar index – DXY pierced $106.50 we could see Gold break $1800 and if it did not – then gold could rally….….in fact gold came under pressure yesterday as the dollar teased higher but is up today as the dollar has pulled back off of yesterday’s close at $105.02 – trading at $104.70. But depending on what the FED narrative is today – that could all change…higher rates will send the dollar higher. And that will send gold and other precious metals lower.
US futures this morning are up small….Dow futures up 14, S&P’s up 3, the Nasdaq up 20 and the Russell ahead by 1. Eco data today includes S&P US Services PMI of 50.5 while ISM Services PMI is expected to come in at 54.5 – both pushing higher into EXPANSIONARY territory…something the FED does NOT want to see….Capisce?
European stocks are higher as well…currently up about 0.75% in France, Germany and Spain. Italy up 1% while the UK is only up by 0.2%. Eurozone inflation rose more than the expectation of +8.2% now running at 8.5% in February, but that is down from January’s 8.6%, Core inflation rose to 5.6% up from 5.3%……..So, is that a positive or negative? The ECB minutes also suggested that we can expect higher rates beyond March. Hmm, sounds very familiar….no?
The S&P ended the day at 3981 up 29 pts…. Leaving it in the 3950/4000 range…A move up today of just a couple of points will put us north of all 3 trendlines….and many will see that as a technical positive. And while I agree that that is true – you can feel the nervousness still….and any headline can change the tone on a dime….I suspect that we are gonna start hearing more mixed messages out of the FED as they try to jawbone and control the action…not wanting it to get to optimistic while also trying to prevent it from getting too pessimistic….in the end, it will be the macro data that sets the path.
Remember, Investing is dynamic not static – which doesn’t mean you need to whip it around, it just means you stay the course, don’t try and time it – stick to the plan and take advantage of the opportunities that are created.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Pan Seared Arctic Char with Sliced Potatoes and Olives.
Arctic Char is a cousin of the salmon. It takes well to almost any cooking method and is almost impossible to overcook – since its fatty makeup is very forgiving. This is a one pan dish that goes straight to the plate.
You will need: Small red potatoes sliced into 1/4 slices, s&p, skin on char, olive oil, fresh rosemary, Kalamata olives, chopped Italian parsley, balsamic vinegar and lemon.
Boil the sliced potatoes for 5 mins. then drain and set aside – let cool.
Season the Char with s&p. Set aside.
In a sauté pan – heat some olive oil – place the seasoned char skin side down in the pan – careful not to crowd. Cook for 3 or 4 mins. Flip and cook for 3 more mins… remove and place on plate. Cover to keep warm.
Now add a touch more oil and heat. Add the potatoes and rosemary… cook for about 4 or 5 mins… turning occasionally. Add the olives, parsley and balsamic (about 1 tbsp.), and s&p – heat gently. Place the potatoes and olive mix on the plate with the seared Arctic Char. Serve immediately with lemon wedges. Remember – it’s all in the presentation.
Buon Appetito.
