Things you need to know.

–        It is FED Day – investors expect a hike but brace for the guidance.

–        Oil gets slammed on global economic concerns – expect the Kingdom to announce more cuts.

–        Every sector got hit – other than Consumer Staples (think defensive)

–        Tech and Gold traders are betting on a pause…if not a cut.

–        Try the Sole Meuniere

Is reality setting in?  Are investors finally beginning to warm to the idea that the economy is slowing yet the FED is going to continue to hike and remain hawkish until they feel like that have killed the beast? Will today’s FOMC announcement continue to push that narrative?  Stocks which started weak -only got weaker as the early morning turned to late morning….by 11 am the Dow was down by nearly 500 pts….or 1.3%, the S&P down 45 or 1.1%, the Nasdaq down 150 or 1.2%, the Russell got slammed down 37 pts or 2% while the Transports took the lead – falling 315 pts or 2.2%….Stocks remained lower for most of the day – but recovered just a bit by the time the closing bell rang. By the end of the day – we saw the Dow down 370 pts or 1%, the S&P down 50 pts or 1.1%, the Nasdaq lower by 132 pts or 1%, the Russell took it the hardest – falling 37 pts or 2.1% while the Transports lost 175 pts or 1.25%.

Eco data revealed a mixed to weaker outlook…the JOLTS reports (Job Opening Labor Turnover Survey) reported just 9.59 mil jobs available….and while that still sounds like a lot (and it is) that is down from nearly 11 million jobs only 2 months ago…..Factory Orders -weaker down 0.7%, Cap Goods Ordered -down 0.6%, Cap Goods Shipped down 0.5%….all this as the FED prepares to announce the next rate increase today at 2 pm…

Regional banks which appeared to have stabilized on Monday as Jamie Dimon told us he thought ‘the worst was over’ – got slammed on Tuesday….and I mean slammed.  PacWest -26%, Western Alliance – 15%, – …. both reported double digit declines in qtrly deposits and that triggered multiple volatility halts which only added to the angst. In addition, the CRE – Commercial Real Estate mkts remains an issue…. but let’s be clear –…. It is really the office building landlords that are getting hit amid this renewed sell off and that is causing lots of concern about the health of the regional banks because it is those regional banks that hold so much of debt owed by the landlords.   The XLRE – S&P Real Estate ETF was down 2.1% at mid-day – by end of day the XLRE lost 1.7% to end the day at $36.76…..It remains below all 3 trendlines as investors decipher the next move and based on the technicals – it would not be surprising to see the XLRE trade down to $34 ish (March low) before its finds stability.

The KRE – The S&P regional bank ETF was down 7% at noon…. the BKX – the KBW regional bank ETF was off 5.25% at noon…. making it the worst day for regional banks since the SVB collapse. At the end of the day the KRE was down 6.3% while the BKX was down by….4.5% and the weakness suggest that there is more to come.

Energy – XLE also getting slammed – down 5% at 1 pm as the weaker economic data sinks in and the reality of that ‘elusive recession’ hits home. The ‘steeper than forecast’ drop in job openings along with weaker factory orders and the upcoming FOMC decision appeared to be too much for the markets to bear and so, as discussed in prior notes – when the future remains unclear –  the path of least resistance is DOWN…by the end of the day WTI  fell 4.1%  or $5.45 to end the day at $71.54 – the sense is that the FED is caught is between stubbornly high inflation and weakening eco data and that spells – STAGFLATION….and for those of us that were alive in 1979/1981 – you get it….we lived it…..the generations behind us – just don’t get it….and it’s not their fault…they just never lived it – but they are gonna live it now….This morning – oil is trading at $71.60 and if it remains in the low 70’s expect to hear the Saudi’s threaten more production cuts to force oil back to the $80 level.

And then toss in the drama created by the clowns in DC over the coming debt ceiling and BOOM….you find some investors have every reason to hit the sell button….while there are others that continue to hit the buy button…Remember – for every trade there is both a buyer and a seller…so while some want out – there are others that want IN. The issue is that the buyers recognize that the sellers are anxious….so, what do they do?  They withdraw inline bids and move them lower…leaving a void in demand – and that makes the sellers even more anxious…and the fact that much of this is done by algorithms – explains the speed at which the sell off can happen.  (And by the way – when the data is good, the opposite happens, sellers recognize that buyers are anxious to get in, so they cancel in line offers and move up the scale). 

A look at the sectors reveals that Energy took it the hardest down 4.3%, Financials took second place – down 2.3%, Industrials, Utilities, Communications, and Real Estate all down between 1% – 2%, while Tech, Healthcare and Basic Materials fell less than 1%. Consumer Staples were the only sector that rose…. small but it did rise…think defensive.   Now you say TECH?  How come that didn’t get hit harder- as rising rates hurt tech – Well, tech traders are betting that the FED will pause…and some of them continue to think that the FED will pivot and cut before year end…something I don’t see happening. 

Gold which has been under pressure due to the possibility of ongoing hikes, spiked higher by 1.7% or $33/oz to end the day at $2026. This would suggest that gold traders are also betting that today’s hike will be the last hike in this cycle…This morning gold is trading right there.

In the end – the markets remain skittish…. but there should be some clarity today…. will the FED pause now, or will they leave the door open?  My sense is that they will leave the door open and say they remain data dependent. Remember – at the press conference reporters will try to pin him down on what’s next. If he sounds ‘hawkish’ at all – meaning he is leaving the door open to another hike in June, then I would expect the market to back off, and if he suggests that they are done (for now) I would expect the market to take off…. something I am not expecting.  Also, expect to hear some of them to ask about rate cuts…. which is curious to me because large asset managers do not expect the FED to cut this year at all, it is the trader types that are making that bet….

In the end – I don’t expect to learn anything new…..I think the narrative remains a little bit hawkish – Today’s hike will take the terminal rate to 5%-5.25% – still below the inflation rate, a hike in June would take the terminal rate to 5.25% – 5.5% – a level that matches / exceeds the inflation rate and that is where the FED needs to be.   It is then that I see a pause… not a pivot or a cut, just pause….and unless inflation plunges and unemployment surges, I don’t see how they can justify cutting rates at all.  

Treasuries remain inverted –  investors piled in sending prices up – think safety trade – and that caused yields to decline…..The 2 yr. yield fell by 17 bps to end the day yielding 3.96% – down from  4.13%, the 10 yr. yield fell 14 bps to end the day yielding 3.42% down from 3.55% while the 3 and 6 months are yielding 5.18% and 5.% respectively.  12-month CDs at the bank will still give you 5+%.

Eco data – ex the FOMC meeting – includes ADP employment and it is expected to show a gain of 150k jobs…S&P US Services PMI of 53.7 – (expansionary), ISM Services PMI of 51.8 (expansionary) – and that is important because the US economy is a 75% SERVICES economy….The FED would like to see those number sub 50….which would suggest contraction.

In Europe – markets ended lower yesterday…. The ECB is expected to raise rates on Thursday….to combat stubborn (rising) inflation…. Monday’s Eurozone Flash Inflation data showed us that prices ROSE by an annual rate of 7% which is up over last month.  Remember – the ECB is also using 2% as the target rate and with the latest data – they are still 5% away from achieving that goal and Christine Lagarde – President of the ECB has made it very clear – Inflation is the mandate so listen to what she says on Thursday after they announce the latest rate hike.  Do not expect to hear her say they are pausing….

The S&P closed at 4119 down 48 pts…. I’ve been saying that it feels tried to me…and that the recent high of 4165 ish felt toppy and the action yesterday proved that point. We are still about 80 pts from trendline support…. – 4033 which is now only a 2% move down from here…. I still think that we could test 3800 before this is over…. which represents a 7% move down from here.

Remember – as a long-term investor – stay the course….be patient….  

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.”

Sole Meunière – easy to make and can be varied according to your own tastes:

You will need:  Dover sole (or lemon sole) flour, s&p, butter/oil, lemon, parsley and capers (optional).

Rinse and pat dry the filets – Combine flour, salt and pepper – dredge the filets and set aside. 

In a skillet over medium-low heat, melt the butter and add a splash of Olive oil to prevent the butter from burning.   As soon as the butter stops foaming place the filets in the pan – being sure not to overcrowd the pan (maybe 3 fillets at a time). Cook for 2 – 3 mins then turn and cook for an additional 2 – 3 mins depending on thickness of the filet.  Only turn once during cooking. Repeat until you have sauteed all the filets.

Place the filet on a warmed platter and melt a bit more butter in the skillet – turn off the heat so that you do not burn the butter…. squeeze the fresh lemon into the butter – add capers.

When completed – pour this sauce over the filets – sprinkle with fresh parsley and serve immediately.   Serve this dish with French cut green beans – that are first blanched in salted water, then shocked in a cold bath then quickly sautéed in a bit of butter and s&p.  Easy, quick and good for you.

Buon Appetito