Things you need to know.
– CPI was neutral – not good, nor bad…. Inflation still hovering around 5.5%
– PPI due out today…. we wait.
– Treasuries decline and fears of a deeper recession take root.
– Oil steady, gold steady….
– More noise about the debt ceiling is just that – noise.
– Donny joins the chorus and advocates for a ‘default’! (Dumb!)
– Try the Chicken w/Pancetta and Balsamic Vinegar
CPI y/y ticks at 4.9% – on the top line but remains elevated at the y/y Core level – where the print came in at 5.5%…..m/m prints came in spot on the estimates so there was no real surprise there….futures which had been lower coming into the report – did an about face and rallied nicely into the opening bell….as the headlines screamed – ‘Inflation is cooling!’. The algo’s were giddy with excitement – sell side interest disappeared as buyers lined up at the gate….and BOOM…. we’re off! Stocks surged on the opening across all the indexes as the story became all about how the FED is now on the path to pause in June (and begin to cut rates in July) ……. The rate hiking cycle is over! Mmmmm – ok – you can run with story, or you can consider this –
Yes, the top line rate did tick at 4.9% -that ‘s good, no doubt, but the core rate remains solidly in the 5.5% camp and that is EX food and energy….but includes housing…and housing remains stubbornly high…..the current terminal rate is 5% – 5.25% – and so you COULD argue that the FED has succeeded in bringing that rate above the inflation rate if you use the core number (4.9%). But if you use the ‘EX’ number (5.5%) then the terminal rate remains below the inflation rate….and so therein lies the dilemma. Which data point are you going to use…. well, like anyone you are gonna use the one that ‘makes your argument’!
Like I said – stocks rallied right out of the gate but weakened as morning turned to afternoon….with the Dow down more than 300 pts, the S&P off by more than 45 pts, the Russell lower by 6 pts by 1:30 pm, while the Nasdaq traded down to the unchanged line – never going negative as investors/traders and algo’s tried to figure it out. Was the report all that it seemed or are there still some underlying concerns about what this report revealed? By the end of the day – it was a mixed bag – the Dow lost 30 pts, the S&P gained 18, the Nasdaq (was the winner) rallying 126 pts or 1%, (this says that investors are now betting the hikes have stopped), while the Russell gained 10 and the Dow Transports (like the Dow Industrials) lost 42 pts.
Now remember what we discussed earlier in the week – the job market remains strong, wages remain strong, and the unemployment rate remains at historic lows – all measures that need to weaken if the FED is ultimately going to be successful. Services wages continue to rise as we all hear stories about how restaurants, hotels, etc.…can NOT hire people…. Service sector workers are demanding more and since the US economy is a 75% services economy that also poses an issue for JJ and the FED. So, while the CPI wasn’t a bad report, it wasn’t really an outstanding report either…. there are still concerns for us to be aware of…. that’s all…. The current CPI is still 3% age points higher than the target rate of 2%.
I think what the action reveals is that investors are becoming a bit more concerned about the coming recession vs. a heating up of inflation. And why does that make some sense? Because the industrials and transportation names were weaker – while technology names outperformed….and what this means is that if we go into a deeper and longer recession the Dow names will struggle as the economy weakens while technology should benefit because the FED will be forced to CUT rates to mute the weakness in the economy (tech/growth names love low interest rates)…and there it is….that elusive rate CUT that the traders are banking on….the move up in the Nasdaq confirms what the rumors are -meaning it confirms the rumors, but it does NOT confirm what the FED will do….only what it could possibly do….……Oh, it is a tangled web we weave, isn’t it?
In any event investors lined up on both sides (as they always do) …. some thinking the news was enough for them to jump in, while others continue to tweak – allocating and reallocating monies and stocks in their portfolios. The S&P traded up to 4154 – just 10 pts below the most recent highs and a level that I am sure continues to represent resistance…. until we get some more clarity with today’s PPI report and the end of months PCE report….
Treasury prices rose on the news sending yields lower…. the 2 yr. falling 10 bps to end the day yielding 3.91%, the 10 yr. lost 7 bps to end the day yielding 3.48% while the – & 6-month bills are yielding 5.29% and 5.09% respectively. And a bill set that we haven’t talked about – the 1-month treasury ended the day yielding 5.52% – a good 50 bps above the terminal rate – as investors in that asset class are betting that the debt ceiling discussion will NOT be resolved anytime soon. And that does not mean they think we are going into default; it just means that the clowns in DC will drag it out….
And speaking of clowns – Janet is at it again when discussing the debt ceiling debate…. The other day she described it as a ‘catastrophe’, last month she described it as a ‘tragedy’ and yesterday she told us that it would be ‘unthinkable’ for the US to default on its debt (note the inflammatory language) – saying.
“The notion of defaulting on our debt is something that would so badly undermine the US and global economy that I think it should be regarded by everyone as unthinkable.”
And then last night Donny (another clown) told a CNN audience that the GOP should let the US default unless the DNC agrees to spending cuts…and that nails the coffin shut for me….A presidential candidate advocating for a US default is not someone I would support….so he’s out…and like I said yesterday – I don’t think he (or Jo Jo) will be at the top of either ticket in November 2024….but that’s another conversation…..
Again – can we please stop the histrionics? No one, other than you and now Donny and the Democrats continue to talk about the US defaulting…and that is extremely disingenuous – why? Because we all know that that is NOT happening…. the US is don’t default on anything – Venezuela defaults, Argentina defaults, Brazil defaults, Greece defaults, are you putting the US in that camp??? ….and if we do default, then the buck has to stop somewhere and that my friends would be at 1600 Pennsylvania Avenue. In the end – it is the President who was elected to lead and if the US defaults on its debt – it will have happened under the Biden/Harris Administration…. Period, the end. Just sayin’…. And while they will try to say it was the GOP who caused it – it is the DNC who is in control, so they need to negotiate – remember that. Last time I checked – this is still a democracy….(I think…) Remember – both sides have to WIN something….Jo Jo has to appear as if he did not give up anything and that congress raised the debt ceiling with NSA (no strings attached), while Kevin McCarthy needs to show that he got something…Otherwise he risks a revolt by his own party in the House.
Today we get the PPI – which is the producer price index – will be a report that reveals what producers are paying for the raw material they need to produce. PPI on the top line is expected to be up 0.3% (a 0.8% swing) while PPI final demand y/y is expected to be +2.5%. Once again if you take out food and energy – PPI is expected to be up 0.2% m/m (vs the negative 0.1% print last month) and +3.3% y/y…. Now after yesterday’s CPI report – anything could happen….so get ready….
US futures were UP this morning…on what many expect will be a positive PPI report which will seal the deal – putting the FED into pause mode come June 14th – when the next FOMC policy announcement hits the tape. But that tone has changed…. leaving investors unsure of what’s next or what’s more important…. inflation or recession? Dow futures are down 35 pts, S&P’s up 5 pts, the Nasdaq up 20 pts while the Russell is down 1 pt. Other eco data today includes the usual Thursday suspects…Initial Jobless Claims of 245k and Cont. Claims of 1.82 million. Neither of which will drive the action.
Oil – is holding steady at $73.40/barrel while Gold is down $5 at $2.035/oz.
European markets are a bit higher…. up between 0.3% – 0.5%. The BoE (Bank of England) is due to announce their rate decision and they are expected to raise rates…. that would be their 12th hike taking their terminal rate to 4.25%….and it would also be because inflation in the UK is ticking higher…. even as they continue to raise rates…. On top of that – now we have the Europeans chiming in on solving the debt crisis – calling it ‘vital’ that the US reach a deal, and that Jo Jo needs to make it happen. See the pattern here? Jo Jo – needs to make it happen – I mean he is the President…. time to suck it up…
The S&P closed at 4137 up 18 pts…. after trading as low as 4098 and as high as 4154…. Yesterday I said that if we get a stronger CPI, we could see us test trendline support at 4045…. we didn’t get a stronger report, nor did we test 4045…. An inline report might see a small rally – which – in the end – is exactly what we got…a small overall rally…. The Dow industrials and Transports fell, while the S&P, Nasdaq and Russell rallied a bit. A weaker report would have seen a more significant rally – and that did not happen….…. I still think that the recent highs of 4165 remains resistance…. And I still think that the FED will raise rates again in June. I don’t think yesterday’s CPI print changed the narrative…but let’s see what today’s PPI print says and does….
On a side note – News out of the House that Committee Chair James Comer released new evidence of Biden Family Influence Peddling had little to no effect on the markets or investor psyche……while this is of interest to the country – as a side show and good for SNL on Saturday night – it is of NO interest to investors – and is nothing but noise – so, don’t go making investment decisions on this….
As a long-term investor – stick to the plan, build a more defensive portfolio to help weather the storm…. Use short duration treasuries as a holding place for cash – until you get ready to deploy it while using the contra trades to help protect you in a downdraft….…. In the end – broader market weakness brought on by histrionics – presents an opportunity in big mega cap names across the sectors for the long-term investor.
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; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Chicken Thighs w/Pancetta and Balsamic Vinegar
It’s a game of chicken….so try this chicken recipe tonight.
For this you need: Olive Oil, Diced Pancetta (Or Bacon), 8 Medium Sized Skinless Chicken Thighs, Onion, Diced, Garlic Cloves, Peeled & Minced, Dry Red Wine, 1 Can Diced Tomatoes, Tomato Paste, Water, Chopped Rosemary, Chopped Thyme, S & P, Red Hot Pepper Flakes (Optional), Balsamic Vinegar, Chopped Fresh Parsley
In a large heavy skillet, heat the oil over medium heat and cook the pancetta until cooked through and lightly browned, about 5 minutes. Remove the pancetta to a plate, set aside, and brown the thighs well on all sides, for about 10 minutes. Remove the chicken to the plate and cook the onions until translucent and soft, stirring often, about 5 minutes.
Add the garlic and sauté for 3 mins or so, Add the wine, (about ½ cup) increase heat to medium high heat, and cook just until the wine is reduced by half.
Now add the tomatoes, tomato paste, water, rosemary, thyme, salt, pepper, and red pepper flakes if you are using.
Bring to a boil, then reduce to a simmer and return the chicken and pancetta to the pot. Cover the pan, and simmer for 20 mins, or until the sauce has thickened, adding additional water as needed if the sauce thickens too much. Taste the sauce, and adjust s&p as needed. Now stir in about 1 tblsp of balsamic vinegar – mix well and place the chicken on a platter.
Top with the sauce, then sprinkle with the chopped fresh parsley.
Buon Appetito
