hings you need to know.
– What have I been telling you? Hello? Higher rates….
– FED is fractured but the path remains hawkish.
– 10 yr. Treasuries spike higher, Shorter Duration bills top 5.5%
– Oil trades at $80, Gold tests lower and the dollar holds steady.
– Try the Fava Bean/Broccoli Risotto
It’s getting hot in the kitchen…. the temperature is rising as the FED mins reiterate the need for ‘higher for longer’….…….
Now, unless you have been living under a rock – the FED mins showed nothing new UNLESS of course you were in the camp that thought they were about to pause – a camp I was not in – In fact, the minutes said it this way…
“Most participants continue to see significant upside risks to inflation, which would require further tightening of monetary policy.”
Now there were two FED members that favored leaving rates unchanged in July – but – that wasn’t happening…. ultimately the committee unanimously authorized the latest 25 bp hike…. Moments after the minutes were released – Evercore ISI economist Krishna Guha – laid it out……telling clients that.
“Minutes from the July FOMC meeting frame the emerging tension between inflation data that is moderating faster than the FED anticipated and growth data that is coming in stronger than the FED anticipated.”
Suggesting that the FED is stuck between a rock and a hard place. The July hike brought the US terminal rate to 5.25% – 5.5% – the highest it has been since 2001……but the mins are now suggesting that we need to brace for more….I think and I have been saying (ad nauseum) that we need to brace for a 6% terminal rate….a half dozen FED heads have been intimating that as well. Neely Kashkari – Minneapolis FED head also confirmed that on Tuesday when he said that inflation is STILL too damn high at the same time that he said that he wants to impose tighter regulations on the regional banks.
Now to be fair – Bloomberg Economist – Stu Paul doesn’t see it this way and had this to say.
“Though the post meeting statement and votes showed a united committee, the minutes confirm there’s a dovish contingent and that bond market bets on a finished rate hike cycle are likely accurate.”
Bond market bets on a finished rate hike cycle??? So, this guy is betting that we are done – did he read the mins? In the end – that is what makes a market -both buyers and sellers!
This as JJ told reporters on July 26th that “we intend (again) to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target and we’re prepared to further tighten if that is appropriate”.
Oh boy…. it’s so confusing……tighten, pause, tighten, cut, tighten, pause…come on already…. This reminds me of ‘Stop the World, I want to Get Off.’ The 1961 musical that is set against a circus backdrop…. LOL…. need I say more?
In any event – the algo’s did not like what they heard…..and stocks – which had been churning all day – headed south upon the release of the mins….by the end of the day – the Dow lost 180 pts or 0.5%, the S&P down 34 pts or 0.8%, the Nasdaq down 156 pts or 1.15%, the Russell down 25 pts or 1.3% and the Transports lost 157 pts or 1%. Just to be clear that now puts the Dow – 2.5%, the S&P – 4.4%, the Nasdaq – 6.5%, the Russell – 6.6% and the Transports – 5.5% since their recent highs 3 weeks ago. And this also makes sense – we have discussing it, the market action should not be a surprise at all….Remember – anything less than a 9.9% move lower is considered within the normal range of trading….so this is normal – there is no reason to light your hair on fire (yet).
And the WSJ makes it very clear.
“Bond Yields Hits Highest Since 2008, Adding Pressure to Borrowing Costs – Bets that interest rates will fall have suppressed 10 yr. yields for most of 2023, but analysts warn that may be changing.”
Treasury yields hit a 15 yr. high – and that suggests steeper borrowing costs (higher rates) and that is what is raising the temperature in the kitchen – causing investors to consider the potential fallout for stocks – think aggressive ‘sexy’ growth names (tech), think utility stocks, think bonds, think housing…. …the 10 yr. yield ended the day at 4.258% up from 4.220% on Tuesday – a rate not seen since the collapse of Lehman Brothers on September 15th, 2008! (That’s just a reference point – I am not suggesting any imminent collapse of anything). In the end – the 10 yr. is still below the current terminal rate set by the FED – and what that means is that 10 yr. yields could still rise….and if that happens – THAT will REALLY turn the heat up in the kitchen…Capisce?
Now the 10 yr. yield has been moving up for 4 weeks now…. July 18th they were yielding 3.78% – and that is being credited to ongoing solid eco data suggesting that the elusive recession will remain elusive. Longer term treasury yields are also getting a boost – after the government made it clear that they will need to ‘borrow more money’ than anticipated to finance all the freewheeling spending by the Biden’s (and the far left Democrats) and all that means is that there will MORE (bond) supply on the markets – which takes us back to Econ 101 – Supply and Demand. More supply = lower prices = higher yields…. it’s not complicated…. just not sure why no one in the administration understands it.
The 2 yr. held steady at 4.95% while shorter duration bills – 3 & 6 months – continue to tease you by offering 5.48% and 5.52% respectively. 1-yr. CDs are now pushing 5.5%. Are you beginning to see ‘other’ options for investors?
Now, every sector was lower yesterday except Utilities – which seems a bit odd, no? I mean higher yields will put pressure on utilities – remember that utility stocks are good divy payers…they average about 3% – 3.5% ish….and when rates were 0 – the utility stocks were all the rage, but as rates move up to 4.25%+ then utility stock come under pressure and this year as rates rose – investors punished utilities – taking this ‘boring’ sector down 10.2% ytd…. So, does yesterday’s action – suggest some bargain hunting in space? Maybe…. Does the positive action in? Metals and Miners – XME +0.3% (It is only up 1.9% ytd), Coal and Nat Gas stocks + 0.6% (they are down 16% ytd) and the contra names – DOG + 0.9% (down 3% ytd), PSQ +1% (down 26% ytd) & VIXY +1.6% (down 55% ytd) suggest the same?
The worst performers yesterday were Consumer Discretionary – XLY down 1.25%, Tech – XLK down 1%, Communication – XLC – 1.2% (these 3 sectors are up more than 30% ytd). Housing – XHB lost 1.4% (it is also up 36% ytd), Semi’s down 2% (they are up 38% ytd), Cyber Security – CIBR down 0.9% (it is up 15% ytd), Airlines & Travel – JETS -0.8% (it is up 15% ytd)…are you seeing where investors are locking in profits and reallocating to the underperformers? Yes, they took money out of nearly every sector, but they are taking more money out of the outperformers – and that makes sense. Individual hits like TSLA – 3%, AMZN – 1.9%, META – 2.5%, NVDA – 1%. Ok – you get it…. enough said.
This morning – US futures are up small…and again that makes some sense as stocks struggle to find stability…. Dow futures are + 78 pts, the S&P’s +10, The Nasdaq +33, and the Russell is +3. Now this is nice – but it is not convincing…. it’s laughable that Bloomberg suggest that ‘futures are hinting at a ‘recovery’……Recovery? OMG! I think you have to let go of the idea that the FED was done raising rates and put on your big boy ‘panties’. The FED waited way to long to move on rates, the Biden’s spent way too much money on stimulation to ‘reduce inflation’ – other central banks and gov’ts around the world did the same…so it’s time to pay the piper…..Which doesn’t mean – disaster, but it does mean this is not the time to go to bed….Understanding the long game is the issue for the long term investor, while chaos is the issue for the short term investor – they are opposing forces – don’t get caught in the drama of it all.
Build your plan, execute your plan, stick to your plan. Talk to your advisor, get comfortable with being uncomfortable.
European markets are churning (lower)….as investors there grapple with the latest headlines concerning the FED and US rates….and then what that may mean for the Eurozone…. We already know that inflation remains an issue across the countries and that the ECB, and the BoE have made it clear that investors there can also expect higher rates…. In the end – it’s not a disaster at all…markets across the continent only off by about 0.15%.
Asian markets ended the day mixed with China creating more drama…. some now suggesting that the real estate problem in China is ‘worse than expected’ – home prices are down 15+% in ‘prime neighborhoods around Shanghai and Shenzhen’. In addition, we have the ongoing drama surrounding Country Garden – a company that was considered financially sound has now triggered all kinds of default and contagion fears in the region…. Again – take everything with a grain of salt. Stay invested in the developed world (vs. the emerging world) and you’ll be good.
Oil is now testing $80 – a level that I think should hold…..the move lower being credited to the ‘China slowdown’ – something I think is ridiculous….UBS just raised their target for oil /Energy – citing ongoing global demand (including demand from China) and shrinking production by the Saudi’s and the Russians (OPEC). All 3 trendlines are converging at $75.50 barrel with the short term trendline pushing up and thru both the intermediate and the long term trendline and that is called a Golden Cross which usually suggests forward higher prices…. Just sayin….
The dollar index is holding tight at 103.40 while Gold continues to push lower…this morning it is down $2 at $1926/oz…. with $1900 in the bullseye.
The S&P ended the day at 4404 – down 33 pts – leaving it down 4.4% in 3 weeks…We breached short term support at 4450 2 days ago….which leaves us in the 4230/4450 broad trading range….A move to 4230 would represent another 4% move lower from here – which would still be within the 10% normal trading range data point….as it would result in an 8.4% move off the high….so, put that in your head as a possibility, but do not put it in your head to panic….the panic starts at 4140 – that’s the level that tips us into the 10% correction territory….and if we hit that – then a swift move to really shake the branches could easily take another 5% out of it…..But I am not suggesting this is about to happen, I’m just laying it out there for you to have as a data point. It’s always good to have data points as a point of reference.
Reach out to discuss – always happy to engage.
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.”
Broccoli & Fava Bean Risotto
When you are making a vegetable risotto – you can really choose any vegetable you prefer – this way it is always different and always exciting. Sometimes you can make the risotto to reflect the time of year. In the summer it might be today’s dish, Fall – could be butternut squash or corn, Winter might be a winter beet and spring may bring a spring pea risotto. Either way – you get to create as you go.
For this you need: broccoli florets (cut into small pieces) stems separate and also cut in small pieces. Fava beans, s&p, olive oil, chopped scallions, chopped shallot, Arborio rice, dry white wine, vegetable stock (about 7 cups), butter, fresh grated Parmegiana or Grana Padano Cheese.
Steam the florets for 1 minute – remove, steam the stems until very tender, about 4 minutes. Keep the water… do not toss. Put the stems (only) in the food processor, and process until smooth. You may have to add some water to make a smooth mixture. Scrape out the puree into a small bowl and set the florets and puree aside.
Heat the olive oil in a heavy pot over med heat, add the scallions and shallots and sauté until translucent – maybe 5 mins.
Nest add the rice and stir to coat with the oil. Continue to cook so that rice begins to become translucent. Maybe 2 or 3 min). Pour in the wine – do not overdo… maybe like ½ cup and stir until evaporated. Add a ladle of the hot stock – stir. Stir constantly, until all of the stock has been absorbed.
Continue to add hot stock one ladle at a time – just enough to completely moisten the rice—and cook until each successive batch has been absorbed. After the risotto has cooked for 15 minutes, add the broccoli purée and the fava beans. Stir to mix well. About 3 minutes after that, stir in the broccoli florets. Stir constantly and adjust the level of heat to medium/med low so the rice is just simmering while adding the stock, continue until the rice mixture is creamy but al dente. This should be no longer than 20 mins from the first ladle.
Remove the pot from the heat. Add the butter, until melted, then the grated cheese. Adjust the seasoning with salt, if necessary, and pepper. Serve immediately, ladled into warm bowls.
Buon Appetito
