Things you need to know.
– FED Mins were more hawkish…. Rates to rise even beyond September?
– Algo’s go into sell mode…. (Apparently, they haven’t been listening)
– Lots of eco data out today and tomorrow – what will we learn?
– Xi Xi takes retaliatory action against Joey.
– Global markets under pressure….
– Try the Watermelon / Tomato Salad
Stocks fell! It’s not more complicated than that – Remember the whole ‘trees grow to the sky’ comment? Yeah, well…. they don’t. The Dow gave back 130 pts or 0.4%, the S&P fell 9 pts or 0.2%, the Nasdaq lost 25 pts or 0.2%, the Russell choked – falling 24 pts or 1.25% while the Transports gave back 88 pts or 0.6%.
Factory orders came in at +0.3% vs. the expected 0.8% although Durable Goods did beat the expectation of +1.7%, coming in at +1.8%. Capital Good Ordered and Shipped came in as expected. But it was the 2 pm FED mins that really set the tone in the afternoon and is setting the tone (around the world) today. Global markets are under pressure and US futures are pointing lower……. more below.
And while I would say that we didn’t learn anything new – I guess the smart logic algo’s thought differently……and they did not like the headlines… sending stocks lower…. Remember that these ‘smart logic algo’s’ scrape the headlines from everywhere and then react – a positive headline causes the algo’s to go into buy mode while a negative headline causes a sell mode. .….and yesterday the headline was decidedly negative……. –
FED Officials Expect Additional Rate Increases While Tempering Expectations of ANY Rate Cuts!
Now is there anything new or positive in that headline? No. Isn’t that what JJ and other members of the FED have been saying all along? Yes. In addition to that – the staff officially predicted a recession (although they didn’t define the extent of it…) only that the starting point remains elusive….Recall – in the spring of 2022 – 4 months after the yield curve inverted – nearly every street economist was projecting a 12 – 16 month time frame for the recession to hit….because that is the ‘historical time frame average’ and that time frame pointed to February – May of 2023….. Well, it’s now July 2023 and there is no recession which is causing some investors to suggest that when it does come, it will be harder and longer than expected vs. the shorter, softer prediction that others are hoping for.
The news also confirmed that the markets are now pricing in a definite 25 bps hike in July and most likely another hike in September….Again – that is also NOT new news…..But it did cause the trader types to run for the door…..as they try to lock in profits ahead of what may now look like more volatility ahead over the summer and into the fall…..Which is usually a volatile time anyway, but again- I say – there is nothing new here! So as a long-term investor – that has a well-diversified portfolio – there is nothing to do (yet). But if you are a day trader there is ALWAYS something to do because that is WHAT you do…
The question now becomes…OK – rates are going up, but for how long and when they get to the 6% terminal rate – which Cleveland FED Pres Loretta Mester, St Louis Fed Pres Jimmy Bullard and even Minneapolis Fed Pres Neely Kashkari floated months ago…. How long will they stay there before they decide to CUT rates? Assuming that the next move would be a rate cut. Remember – the clowns that told us that the FED would raise until June and then begin to cut rates in September – which NEVER made any sense to me at all…. leaving rates down 75 bps before Christmas? Yeah, me too. And after yesterday – that is not happening.
We’ll be lucky to get a rate cut before the summer of 2024…. And so, the markets are now reconsidering valuations…. which are stretched to put it mildly….and stretched valuations do come under pressure at some point. We just need to figure out ‘how much pressure’ they will come under. And do not discount the idea that the pendulum swings too far left (as in the overstimulation for way to long) and now it can and probably will swing to far to the right (as in overtightening) and that will cause the recession to hit….
There is a lot of eco data today – and that will help set the tone as well…. Mortgage Apps out at 7 am fell by 4.4% as mortgage rates tease 7% (and likely going higher), Challenger Job Cuts at 7:30. 8:15 am brings us the ADP Employment numbers – which are expected to show an increase of 225k new jobs…..(not what JJ wants to see), At 9:45 am we get the S&P Global Services PMI – which is expected to come in at 54.1 (solidly in expansionary territory), at 10 am we’ll get the JOLTS Job Openings along with the ISM Services PMI of 51.2 (still expansionary, but closer to neutral) and all of these data points become even more important after yesterday’s FED mins. But it will be tomorrow’s NFP data that is the real driver…. The FED needs to see job creation decrease, Unemployment increase, Wage growth decrease – but is that what the report will show….? Stay tuned.
In any event – global markets did not like what the FED had to say, and it only confirms what the other central banks around the world have been saying….’We remain hawkish, and rates are going up’. In addition – news that China is now striking back against the Bidens is also not helping the tone in the tech space……Recall that Joey is restricting exports of AI chips to China – for fear that they will do something ‘bad’ (which is laughable…. fear that they will do something bad. Come on! They already used American made technology to spy on us via that ‘weather balloon) and now China is restricting exports of gallium and germanium – which are ‘chip making minerals’ needed to make the chips….and they made it very clear that if Joey doesn’t back down, then they will ramp it up even more…. It is a classic ‘tit for tat’ reaction and I guess you can’t blame them – since they produce the minerals needed for chip production – are you seeing where this is going? Toss in the ongoing ‘take Taiwan’ threats and you can see how the world can change in a minute. But you have to ask – whose fault is that? We gave them the power….
Asian markets ended the day lower…. Hong Kong down 3%, Japan -1.7%, Australia down 1.2%, Taiwan down 1.7% and South Korea lost 0.9%. China service sector slowed more than expected in June. European markets are all down more than 1% – France losing 1.7%, Eurostoxx down 1.4%, the FTSE down 1.3%, Germany down 1.1%, Italy down 1% and Spain off 0.9%. Recall that Eurozone PMI figures also showed a slowdown last month.
And US futures are all lower…. Dow futures down 150 pts, the S&P down 20, the Nasdaq lower by 80 and the Russell is off 14. UPS is getting whacked as contract talks have stalled and that threatens a teamster’s strike and that would not be good for the US economy. Remember – the contract talks are all about wages and benefits…and the teamsters want MORE of both. Capisce?
In addition, the fact that the FED mind has now officially forecast a recession (and I say officially – because prior to this they kept telling us that they could avoid a recession) is bad news for ‘risk assets’ (think stocks). Look – the FED just said, they are forecasting a recession while also saying that they intend to raise rates at least 2 more time….so an S&P that is priced at 20x’s earnings will have to adjust downward….It’s just a math problem…..but think about those sectors that are trading at multiples much higher? (Does TECH ring a bell?) They will adjust much more…. which leaves me to remind you – about what I have been saying…. This is not the time to add to TECH….and any new money can be put to work in the underperforming ‘defensive’ sectors…. think healthcare, financials, consumer staples or even short duration bonds. If you are overweight TECH – you want to bring it inline either by putting new money into those other sectors or ‘trim’ just a bit’ – while maintaining a core position in the mega-tech names – reallocating the money raised into those defensive sectors.
Oil traded higher up and through trendline resistance at $71.30 and is now on the north side trading at $72.12. Guess why? Tighter supplies – recall the Saudi and Russian production cuts for July and now August as well as an aggressive China. Never mind the ongoing demand here at home…even as JJ tries to slow the economy. We are now in the $71.30/$73.60 trading range…. A test of $73.60 will prove to be tough to get through unless OPEC gets even more aggressive with production cuts. Remember – they want to see oil at $80 + barrel.
Gold – remains in line at $1930/oz. – and I suspect it will churn around in the $1900/$1975 range.
The next hurdle for the markets will be the start of earnings season…and that begins officially on July 14th…. Expect all kinds of pre-announcements and analyst revisions in the days ahead.
The S&P ended the day at 4446 – down 8 pts. Yesterday, I said – Do not be surprised to see a pullback ahead of the start of earnings and yesterday’s FED minds. We were expecting the mins to reveal higher rates in the coming months – and that is what we got…. the surprise was what the FED will do next…. beyond September…. suggesting that we could see higher rates in October and November as well.
In the end – Stick to the plan…Do not make emotional decisions.
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.”
Watermelon & Tomato Salad
Enjoy this refreshing and delicious Watermelon and Tomato Salad… The colors, and freshness of this chilled salad will make any summer dinner table a pleasure to look at and more so – a delight to eat. If you have never had this salad – you have to make it… and if you have had it, then you can appreciate the simplicity of it.
For this – you need: Fresh Garden tomatoes, mint, watermelon, feta cheese, s&p, Olive oil, and balsamic vinegar…
Cut the tomatoes in half and then slice the halves into slices (you understand what I mean – no?). Next slice the watermelon and cut away from the rind… cut into cubes and place a large bowl. Now add the tomatoes, crumbled feta and chopped fresh mint… Drizzle with Olive oil and a splash of Balsamic – season lightly with s&p… (you can also hit it with a smidge of sugar) … cover and place in the fridge to keep chilled. Spectacular.
Buon Appetito
