Things you need to know –
*” FED Explores Faster Rate Increases” – WSJ
“FED Unveils Hawkish Tilt as Officials Ready for March Meeting” – Bloomberg
“FED Chair Powell says Interest Rates are Likely to be Higher than Previously Expected” – FBN
Try the Chicken Cacciatore
OK then…. Here we go…..all the big boys suddenly changing their tune….Blackrock and Goldman RAISING their estimates for the terminal rate…with both saying that ‘we could see interest rates peak at 6%’ No Sh*t…. That is not new news…. Cleveland’s Loretta Mester told us that weeks ago when everyone ‘poo pooed’ it saying that she was an outlier because her view was outside of the bell curve…
JPM’s Chief Economist – Mikey Feroli – put it this way – “When Lael’s Away the Hawks will Play!” – Let me remind you – Lael Brainard who WAS Vice Chair and was very much a dove – ‘has left the building’….and has moved across the street from the FED to the White House – taking Brian Deese’s job as an advisor to Joey and Director of the National Economic Council. So, her voice is now absent – and the tone has changed dramatically… …..JJ has now opened the door to higher rates and LARGER increments of change saying that
“if the totality of data indicates that a faster pace of tightening is warranted, we would be prepared to increase the pace of rate hikes…’
So, Feroli says – “at this point – it will be hard for JJ and the FED to NOT raise rates by 50 bps on the 22nd unless the CPI and PPI are significantly weaker than expected….. Fed Fund Futures which had been pricing in a 30% chance of a 50 bp hike yesterday morning – is now upping the ante to a 70% chance of a 50 bp hike as of this morning.
Yesterday morning I ended my note with this –
“I suspect that JJ’s testimony will be cautious but open to all kinds of interpretation…..any sense that he is ‘overly hawkish’ will see us test S&P 3990 and then 3940 fairly quickly….if he is seen as being dovish -then watch as the algo’s take us to February highs of 4160ish….My sense is that the path of least resistance is down not up….just sayin’.”
And down we went! While stocks were waiting for JJ testimony to begin – they were churning in line, but soon after he took the stage the tone changed dramatically and if you look at the chart – it is very clear….precisely at 10 am – when he sat down and opened his mouth – stocks got whacked – the algo’s going apoplectic….The S&P dropped of 40 pts or 1% in mins….and then as the testimony progressed it only got worse….By the end of the day – the Dow gave back 575 pts or 1.7% (and was the biggest loser), the S&P lost 63 pts or 1.5%, the Nasdaq gave back 145 pts or 1.2%, the Russell lost 21 pts or 1.1% and the Transports gave up 188 pts or 1.25%.
Remember going into yesterday morning – the market had been pricing in a 5.1% – 5.4% terminal (neutral) rate – all while the FED has been pushing a different narrative – 5.5% – 6%. Do you remember Jeffrey Gundlachs comments last month….he accused the FED of being ‘stupid’ and that the bond market was telling you to ignore what the FED was saying – that rates would peak out at 4.9%……Hmmm…..How’d that work out?
Last week Fed Governor Chrissy Waller – in an economic presentation accentuated the lower range (5.1% – 5.4%) saying that he thought it would be ‘ok’ and that higher rates would likely not be an issue and that ignited a strong rally – Taking stocks higher…..Something I warned against….saying that based on what I see at the supermarket, at the Dr’s office, at the gas pump and in my monthly utility bill – that wasn’t gonna happen….And BOOOM! It didn’t happen…. JJ’s comments have caused investors, traders and algo’s to reassess….(again..) sending stocks reeling.
As you might imagine – every sector got slammed – with Real Estate and Financials losing more than 2% with the others Industrials, Utilities, Tech, Consumer Staples, Consumer Discretionary, Communications, Healthcare, Basic Materials and Energy losing more than 1.5%…
Now – under the circumstances – I am surprised it wasn’t worse….but I think that is because the bell rang…..had we gone on for another hour – my sense is that stocks would have gone lower and it would have gotten worse.
As expected – Lizzy Warren did not disappoint – revealing that she hasn’t been paying much attention to the conversation…. (Nor has she gone shopping lately). How long have we been discussing the fact that in order for the FED to tamp down inflation – he HAS to break the economy – especially since they (the FED) way over stimulated (by about 8 years) and the current administration and previous congress way over spent money like a drunken sailor….helping to push inflation from sub 1.5% to more than 9.4%.
How long have we been saying that JJ would need to see the unemployment rate go to north of 5% before we would see any relief… It is currently at 3.4%. How long have we been discussing the coming recession – that they completely ignored…I mean treasury yields have been inverted for one year now – HELLO????? Anyone home? Apparently Lizzy was on vacation…and has no clue. Lizzy – telling JJ that his policies would cost some 2 million jobs….and how would he explain his view to anyone that loses their job? His response was clear – ‘Will working people be better off if we just walk away form our jobs and inflation remains at 5% – 6%?
I can’t wait for today’s appearance in front of the House – What will Maxi have to say? How many people think she has a clue? Quick – Grab the popcorn and watch the show…This is sure to rival Chris Rocks’ latest Netflix special……but let’s not go there right now….that’s a whole other conversation!
So as expected, the hawkishness sent bond prices falling causing bond yields to surge…..the 2 yr. piercing 5% – the first time it has done that since BEFORE the GFC (Great Financial Crisis) that began in 2007. The spread between the 2 yr. and 10 yr. is now the widest it has been since 1981. Shorter duration T-Bills – think 6 months are now yielding 5.27%, the 5 yr. yielding 4.34%. CD’s at the bank will now net you 5.25% – let that sink in….
And with higher rates – we can expect a higher dollar….and boy did we get it….yesterday the dollar index went form $104.40 to end the day at $105.62….a 1.1% change….we are now above the trendline at $105.46 – and likely going up…..which means we will see pressure on the commodity complex…remember commodities are priced in dollars – so as the dollar rises – commodity prices should fall and as the dollar falls, commodity prices should rise…. Yesterday I told you that a breach above $105.50 will put pressure on gold…and guess what?
Gold fell by $37 or 2%…to end the day at $1817 – still holding the $1800 trendline, but most likely will test it soon….(maybe today – if the commentary gets more hawkish…not sure how it can, but I’m not surprised by anything anymore).
At some point – I also expect that the FED will ‘re-define’ the inflation target to something higher than 3%.
Oil did an about face on JJ”s comments – and like Gold – Oil also get slammed – falling 4% or $3.25/barrel – trading down to $77.21………. the move being credited to not only higher rates and the higher dollar but the fact that JJ is out to ‘destroy total demand’ in the economy – which will destroy demand for energy – he thinks. Again – the world need energy to spin…..so while we might enter a recession, the world will still need to spin and people will demand energy to run their homes, businesses and transportation….Oil will not suffer because of demand destruction – it will suffer because higher rates will force the dollar higher – and that is what will bring oil prices down…Remember that inverse relationship. Even so, I see $90 before I see $60.
US futures are trying to breathe….Dow up 30, the S&P’s up 3, the Nasdaq up 13 and the Russell up 3….NOT surprising after the performance yesterday….and again, I would be cautious going into today….just because JJ is ON the Hill again and the questions that they ask him today may force him to be even more adamant about where rates have to go….Eco data today includes – Mortgage Apps and the ADP employment report….where it is expected to show an increase of 200k jobs…. – recall that last month – it was very weak….only coming in at 106k jobs…but it is Friday’s NFP report that everyone is waiting for…..so I do not think today’s data will be a market mover….the mover will be JJ on the Hill. Period.
European markets are flat this morning…..UK down 0.1%, France off by 0.3%, and Eurostoxx off by 0.06%. Germany up 0.06%, Spain up 0.06% and Italy up 0.04%. Many in Europe asking if JJ”s comments are a pre-cursor to what they will hear out of the ECB…to which I would say – YES….Strap in – rates are on the rise across Europe as well..
The S&P ended the day at 3986 down 62 pts…. Testing a low at 3980 before the small push up into the bell. Not sure why anyone is surprised by what we saw yesterday…..at all…did you expect stocks to rally on that hawkish commentary? Didn’t we discuss this…Now, while it was not pretty yesterday – I wouldn’t suggest you ‘get out’ and sell everything and put your money into cash or cash equivalents if you’re in the 20 – 60 set…..I might suggest you keep a higher percentage in cash / cash equivalents…but why are you selling your core holdings in names like Apple, MSFT, JPM, T, VZ, PG, JNJ, K and a host of others? I am using the weakness created in these wonderful mega cap US monsters to add to my core position…I am not going way out on the risk scale….but that is also because I am 61, not 31 or 41…..Understanding where you are in the life cycle, and the risk scale will help you allocate accordingly. If you are sub 60 – I would be all in….having an appropriate level of cash defined by who you are. If you need the money in the next couple of years, then I would say – ok…. if it makes you more comfortable…. but for me – it is exactly times like this that separate the men from the boys or the women from the girls. (That’s diplomatically correct no?)
Remember, there was nothing new in what JJ said…..and if you think there was – then you’ve been living under a rock. Investing is dynamic – make the plan and stay the course but remain fluid to take advantage of the opportunities that are sure to come….…. don’t try and time it – Do your research and then invest accordingly,
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Chicken Cacciatore
In Italian – the cacciatore is the hunter – so this means that it is Hunter style chicken. The ‘Hunter’ would sauté garlic, tomatoes, onions, bell peppers, mushrooms, peas, season it with oregano, basil, wine and S&P. You would then cook the chicken in this sauce and serve it over fusilli.
Depending on the part of the country – the recipe changes slightly – Southern Italians use red wine and Northern Italians use white wine…Either way is fine and if you choose not to use the wine – that’s ok too.
You should make this dish the day before you want it – because as with most tomato sauces – if it sits overnight – it is always more robust the next day….
Start by sautéing crushed garlic in olive oil…add the seasoned (sap) chicken pieces – thighs and legs – and brown nicely. No need to cook all the way through as it will cook in the sauce.
Once you have browned the chicken remove and place on a platter. Next add sliced onions, and bell peppers – use 2 leg onions and 1 green and 1 red bell pepper – if you like the orange/yellow ones then feel free to use that also. Sauté the onion and peppers and until soft – about 10 mins…. season with s&p.
Remove from the pot – now add two cans of kitchen ready crushed tomatoes – not puree – just crushed tomatoes. Then add one can of water (and 1 cup of red wine – optional). Season with s&p, oregano, and fresh basil…bring to a boil and then turn heat down to simmer. Add back the Chicken, onions & peppers. Now add one can of sliced mushrooms (draining the water first) and one bag of frozen peas. Let simmer for 45 mins – stirring occasionally.
At this point it is done – but like I said – the longer it simmers the better it is and if you let it cool and refrigerate until the next day – it is even better…….
When ready – bring a pot of salted water to a rolling boil and add the Fusilli…cook for 8 / 10 mins or until aldente. Drain – reserving a mugful of pasta water – return to pot adding back about 1/4 of a cup of the pasta water to moisten…. let it sit for a min and absorb the water – you do not want a puddle in the bottom of the pot. Now add 3 or 4 ladles of sauce and toss. Add two handfuls of grated cheese – Locatelli Romano works great – toss again and serve. You can serve chicken pieces right on top of the pasta or you can serve the chicken on a separate platter.
This meal works well with a nice Chianti – remember this is a meal prepared by the hunter – he is a simple man so the wine should reflect his simplicity.
Buon Appetito.
