Things you need to know.
– The CPI report does NOT change the narrative.
– Stocks rallied hard then FADE into the end of day.
– Futures traders betting on a pause in September – I am not.
– Oil continues to rally – China is a BIG buyer…
– Dollar rises, gold falls, Treasuries mostly unchanged.
– Try the Penne Rigate, Zucchini & Guanciale
CPI suggests that inflation is cooling – kind of – but maybe not…. top line CPI & Ex food and energy m/m both rose by 0.2% (In line), CPI y/y rose by 3.2% which is HIGHER than last month, but was LOWER than the expectation – so is that better? CPI ex food and energy y/y rose by 4.7% which was the expectation and 0.1% lower than last month…. So, yes, I guess you can say that prices continue to slow, but they are still rising ~ 2 x’s the rate the FED is aiming for…
Funny, they continue to focus on how used car prices are in decline, yet they won’t mention the fact that food, energy, insurance, housing and utilities continue to surge…. And I am not sure about you, but it’s the latter groups are the ones that concern me on a day-to-day basis……I mean how many times a week are you buying a used car?
And do not discount what is going on with oil…. Oil is up 26% since June 28the as it went from $65 to $84….and the price of gasoline has surged by 15% and going higher….and that affects nearly everything…….Economists/analysts are expecting this to start to show up in the month end PCE report due out on August 31st and the September CPI report (which is August data) due out on September 13th….just days ahead of the next FED meeting….
Initial market reaction was euphoric…….traders took US futures up triple digits…and when the bell rang – the indexes all shot higher…the Dow was up 400 pts, the S&P had gained 60 pts, the Nasdaq up 235, the Russell had gained 21 pts while the Transports added 190 pts….and all this happened in the first 30 mins of trading…but as the day wore on and everyone opined on what the CPI meant for future FED action and what it meant for inflation and what it meant for the economy etc. In addition – they considered what the uptick in weekly jobless claims means…. – recall that all year – the strong job market has been supportive of the markets but yesterday’s higher number is giving some a reason to consider weakness ahead…..and the euphoria faded…while 4 of the 5 indexes ended in positive territory – it was far from the early morning moves….by 4 pm – the Dow was up only 52 pts, the S&P +1, the Nasdaq +15, the Russell ended the day lower – down 8 while the Transports added 74…..
The sense now is that while the report was not perfect, it does offer some cover for JJ- IF he chooses to pause in September and that is what drove futures higher in the pre-mkt…. – but I still think, we are too far out to make that call (and by end of day – I think that is what the price action is telling us as well)…..We still have 3 more weeks of data for August and then 2 weeks of data in September for the FED to consider……We have the Jackson Hole Boondoggle at the end of the month and we can expect to hear more from JJ and every other Central Bank head around the world….and I do not think we are going to hear any of them talk about cutting rates any time soon….in fact – I suspect that they will all remain hawkish – reminding us that the goal is to kill inflation…..Because inflation is still an issue around the world….
We also have dueling FED heads calling out the next move – which only adds to the chaos….……Fed Governor Mishy Bowman, Cleveland FED President Loretta Mester and Minneapolis’s Neely Kashkari, Dallas’s Lorie Logan and former St Louis Fed President Jimmy Bullard all telling us we need more rate hikes….Philly’s Patty Harker, Boston’s Suzie Collins and Atlanta’s Raffi Bostic on the other side of that argument telling us that the end is near…..San Fran’s Mary Daly is off the radar after her spectacular failure at managing and regulating banks in her region of the country……(think SVB)….No one is really asking her what she thinks (although she did tell Yahoo Finance that the ‘FED has more work to do)…and I’m not even sure it makes a difference what she thinks…. The fact is – it is still very much up in the air…yesterday’s data does not change the narrative (for me).
Today brings us inflation at the Producer Level – otherwise known as the PPI (Producer Price Index) and it details what manufacturers have to pay for raw materials to produce the goods that they then sell to you and me. And what is it expected to show? Well, Final Demand m/m at 0.2% is up from last month, Ex food and energy at +0.2% is up from last month, Final Demand y/y is expected to be up 0.7% – well above last month’s +0.1% while Ex food and energy y/y is expected to be +2.3% which is 0.1% below last month….but look at the data point….EX FOOD AND ENERGY…..that is the issue…because you can’t live EX FOOD AND ENERGY can you? And I already pointed out that food and energy in the CPI report is UP not DOWN…. Again, I do not expect this report to change the narrative…and while you can point to the improving data – I still don’t think it changes the course of history….only because – I think it is going to turn UP again….and that will keep the FED in hike mode….which doesn’t mean panic, it just means don’t break open the champagne yet….
In the end – you have those on one side of the fence that are calling for the FED to pause while those on the other side of the fence continue to call for hikes…….Futures are now pricing in a 90% chance of the FED pausing in September – that is up from 70% just one month ago…..but remember – it was also this cohort that told us to expect 3 rate CUTS before Christmas…..How’d that work out?
Treasuries were little changed at the 2 yr. level – 4.89%…. which is more sensitive to imminent FED moves… We did have a $23 billion auction of 30 yr. money and that forced 30 yr. yields to rise to 4.2557% – a level not seen since 2011. 10 yr. yields remain at 4.10%, while 3- and 6-month bills are yielding ~ 5.45% annualized. So, in the end, yields are all over the place….and that will continue to be a headwind for stocks.
The dollar index erased earlier losses gaining 0.10 cts to end the day at 102.62 – leaving it above both the short and intermediate term trendlines. I expect it to challenge the long term trendline at 103.41 before it tests the recent lows of 101.80.
Oil continued to rally – kissing $84.25/barrel before settling at $82.80 – driven by the ongoing production cuts by the Saudi’s and the Russians in addition to ongoing growing demand…..and no matter what the Chinese tell us about their economy – they remain a big buyer of oil…..Who is kidding who? Bloomberg runs with this headline.
Global Oil Demand Hits RECORD and Prices May Climb……the story goes onto say that global oil demand has surged to ‘a record amid ROBUST CONSUMPTION IN CHINA AND ELSEWHERE’ Capisce?
This morning oil is trading up 25 cts at $83.05.
The recovery in the dollar has done exactly what I told it would to gold….it is forcing gold lower…..Yesterday gold fell by $6 or 0.3% to end the day at $1944/oz – this after it fell by $12 or 0.6% on Wednesday…..It is now below its Long Term Trendline at $1964…..and could potentially test the $1930 level now that it has broken lower….and what that means is that Gold traders expect the dollar to rally and that would happen because the FED will remain hawkish…..If JJ suddenly changes the narrative and becomes the teeniest bit dovish – I would expect the dollar to decline and that would push gold higher…But I do not think that is about to happen just yet…..
US futures are confused…..Dow futures are up 16 pts, the S&P’s down 2, the Nasdaq down 30 and the Russell is ahead by 2 pts. Investors are still hoping for more signs of easing but I think many investors have been too optimistic coming into a seasonally weaker time of the year…….Inflation remains sticky in the parts of the economy that affect you and I everyday…..and that is what will drive the next move…..…. I still think we can expect lower prices in the weeks ahead just because it still feels a bit tiring and that was evident in the market’s retreat from Thursday’s big opening point.
European markets are all lower this morning….the UK is off by 1%, while Spain is down 0.25%….all of the other markets are down somewhere in between….Mining, Travel and Leisure, Auto’s, Insurances and Tech all under pressure… the UK reports 2nd qtr. growth of +0.2% – surprising markets and investors….Economists had expected growth to be flat for the qtr. as demand continues to be hampered by a hawkish BoE and ongoing sticky inflation. UBS strips itself of the $10 bill Swiss Franc Protection Agreement put in place by the Swiss gov’t when UBS took over CS. Investors celebrated that move – taking UBS shares UP 4%.
The S&P sits at 4468 – Up 1 pt from Wednesday…. Yesterday I said that futures suggest that we will test 4480/4500 on the opening … or maybe it could become more emboldened….if the report is more muted….and that is exactly what happened…the S&P tested 4527 before hitting the wall…..I think today’s report will be in line with what the market expects and that we won’t have any surprises…..which means, I think we continue to churn and churn lower….
I have been saying the mkt is tired….and I still do…. I still expect it to back off over the next 8 weeks, but I am not expecting a major drawdown (+10%) …. Why? Because, I think that there are a lot of buyers out there (that are holding cash) that had been looking for a meltdown that never came – and we are now in the second half of the year and they can’t afford NOT to get involved…so any pullback is sure to be bought – Do not chase names that are running away…. There are plenty of opportunities that will balance out and stabilize your portfolio for the longer term. Remember – Investing is a ‘long game’….
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.”
Pasta, Zucchini and Guanciale (cured pork – made from the cheeks of the pig)
This is a simple dish, but will soon become a family favorite…
You need – Diced Guanciale, Sliced garlic, Sliced (half-moons) of green and yellow zucchini, 1 lb. of Penne Rigate and as always – fresh grated Parmegiana/Romano cheese.
Bring a pot of salted water to a rolling boil on the back burner – so that it is ready for you.
Next – dice the Guanciale and sauté in a large sauté pan. Once it is nice and crispy – remove and set aside. In the same pan – add the sliced garlic…. sauté for 2 or 3 mins…. Now add the sliced (half-moons) of the zucchini. (To make half-moons – just slice the zucchini in half lengthwise and then slice each half into half-moons.) Cook the zucchini until it become soft and produces its own juices…. Keeping the heat on med / med high.
Add the pasta to the pot of water and cook for 8 mins or until al dente…. strain (reserve a mugful of pasta water just in case) and put the pasta directly into the sauté pan with the zucchini. Toss and then add back the Guanciale…Add a handful of the cheese and toss again. Serve immediately. Yum.
Buon Appetito
