Things you need to know.
– Bond yields keep climbing….and if Jamie Dimon is correct – they will go higher still.
– Another FED head calls for even higher rates.
– AMZN lights up the AI space – keeping it front and center.
– Jo Jo -makes history and visits the striking UAW workers – begging for votes. KJP (Press Secretary) remains clueless.
– The Chaos on the Hill continues.
– Try the Pumpkin/Butternut Squash Risotto.
Bond yields are like the Energizer Bunny- they just don’t quit……Bonds prices fell yesterday and that keeps sending yields UP and UP and UP…. ….. The TLT – iShares 20 yr. Treasury Bond ETF plunged by 2.5% yesterday taking it down to 89.18…a level it has not seen since January 2011 – that’s right – a dozen and a half years ago – when bond yields were kissing 4.5% – just like they are now….the 10 yr. bond ended the day up 10 bps – at 4.533%.
That bond ETF is now down 11% ytd…. putting that too in correction territory – which now makes two sectors that are in correction mode…. – recall yesterday we identified the small caps are down 11% off their August high- leaving them up barely 1.5% ytd – flashing a warning signal to investors that ‘something is going on…’
Minneapolis’ Fed President Neely Kashkari telling participants at the Wharton School that.
“If the economy is fundamentally much stronger than we realized, on the margin that would tell me that rates probably have to go a little higher and the be held higher for longer to ‘cool’ things off.”
Now this is Neely’s first go around as a voting member of the group and he has been very vocal about where rates should go…. he is (or was) in the group calling for a 6% terminal rate…. that included Cleveland’s Loretta Mester and St. Louis’s Jimmy B (no longer a member of the FED).
This did not help the tone – causing stocks to convulse between gains and losses all day….in the end though, Stocks did snap out of the recent slide to end the day a bit higher. The Dow gained 43 pts, the S&P gained 18 pts, the Nasdaq added 60 pts, the Russell gained 8 and the Transports added 113 pts.
AMZN made headlines yesterday helping the ‘tech’ space by telling Bloomberg TV that their cloud unit is seeing ‘HUGE DEMAND’ for AI chips, this as they announced a $4 billion ‘investment’ in AI company Anthropic (currently a privately held company – but coming soon to a theater near you!)…..and that caused the algo’s to go ‘all in’….. AMZN rose by 1.7%, The Tech ETF – XLK + 0.3%, the Semi’s advanced by 0.7%, Robotics by 0.2%. Individual names like NVDA added 1.5%, AMD +1.25%, INTC +0.2%, & AVGO +0.6%.
The VIX pulled back after its recent surge – falling 1.8% to end the day at 16.89 – just an hour below the trendline at 17.60. – again, I think that is a head fake…. I suspect that we will see the VIX push higher in the days ahead causing stocks to come under more pressure. Look, with rates continuing to move up – you can’t discount the fact that it’s going to impact the economy and the markets…. the good news? You can actually get decent returns on fixed income investments. The bad news? The FED has opted to keep rates higher for longer and that will continue to rattle investors, traders and the algo’s. In the end – the biggest risk is that inflation remains sticky, and the FED keeps hitting their head on the wall….
Oil chopped around all day…. -rising as high as $90.58 only to trade as low as $89.00 before ending the day at $89.68. News that the Saudi cuts are being met with booming US production did cause some of the whiplash yesterday. US production is predicted to hit 13 million bpd in September– matching the record set under the Trump presidency in 2019 just months ahead of the pandemic that crippled demand sending oil prices careening leading to production cuts across the board. …. XOM and CVX report record production despite fewer ‘active rigs’ in fact – Mikey Wirth – CVX CEO thinks that WTI is headed towards $100 – telling us that ‘supply is tightening, and inventories are drawing (down)’. The EIA (Energy Information Administration) now projecting that US crude production will make records in both 2023 and 2024 – And what this tells you is that demand for energy, oil and fossil fuels is NOT going away anytime soon….so stop your whining.
Gold fell $10 on Monday to end the day at $1934/oz…. this as the dollar index did what? It rose by 0.3% or 37 cts to $105.955…. after trading as high as $106.08. Remember the inverse relationship between the dollar and the commodity complex…. stronger dollar/weaker commodities, weaker dollar/stronger commodities. And you can also see that in the BCOM – the Bloomberg Commodity Index that is down 3.2% since the July high of 108 – just as the dollar is up more than 6.5% off the July low of 99.60.
The yields on the 2’s and 10’s rose as bond prices fell…. The 2’s are yielding 5.13% and the 10’s are yielding 4.55%. Shorter duration 3 and 6 months yield 5.5% and 5.57% respectively.
In the end – investors – both institutional and retail – are still very concerned about rising oil prices fanning the flames of inflation and when that happens watch how fast JJ hikes rates at the November meeting and how quickly he suggests that the move could be 50 bps rather than the expected 25 bps. (Again – think the 6% terminal rate level that was floated more than a year ago…. we are just 50 bps away – just sayin’)
Eco data today includes New Home Sales – expected to be down 2.2% – again – I think this has the potential to surprise to the upside…. Why? Again, because home builders can sweeten the deal to attract home buyers…the houses are NEW, the kitchens can be UPGRADED, baths – UPGRADED, and they can buy down the mortgage rate since they own the financing company. So, with current rates pushing 7.5% for conventional loans – suddenly a 7% mortgage is a WIN. We will also hear from the Conference Board and both the Richmond Fed and the Dallas Fed.
US futures are down. The Dow – 140 pts, the S&P’s down 22, the Nasdaq lower by 87 while the Russell is shedding 10 pts. European markets are down, Asian markets closed down, Bonds prices are down – what’s UP? Yields are UP…. the VIX is up this morning – snuggling up against trendline resistance yet again…. What did I just say – I think yesterday’s weakness was nothing more than a ‘head fake’…. let’s see.
Overnight – JPM CEO Jamie Dimon told the India Times that investors should not be surprised to see the FED push rates as high as 7%! – saying that the move from 5% to 7% will be much more painful than the move from 3% to 5%…..If that happens – think about what will happen to revolving credit card rates, HELOC rates and conventional mortgage rates…never mind what will happen to treasury yields…and what that means for equity valuations…. Oh boy, it is tangled web we weave….
Look – with ongoing positive growth keeping a recession at bay – it is difficult to see how the FED, or any other central bank can ease financial conditions anytime soon….and the fact is that while the futures markets think May is a possibility – I’d say ‘not so fast’…. First of all – JJ pushed that idea out to September – maybe you didn’t hear that and second – so much can happen in the next 8 months…. that can completely change the narrative again.
On a side note – the UAW strike is still going strong with no end in sight. Jo Jo on his way to Detroit to walk the picket line the striking workers – this as he begs them for their support……Saying – ‘Look, I came to support you, I walked the line with you, I came out against capitalism, Now I need you to vote for me’. And Kevy McCarthy – is still trying to get his members in line – without much success…..a gov’t shutdown is likely – but don’t buy into the ‘disaster’ narrative – it is not a disaster….it’s all about the perception…..Yes, some people won’t get paid on payday – but everyone gets back pay so in the end – no one is left out in the cold…especially congress….they make sure that they get paid – which is exactly the issue. They are the ones that should NOT get paid – leaving everyone else that is doing their job to GET paid. But let’s not go there right now…. In addition – now we have Moody’s threatening a debt downgrade as a result of this latest battle on the hill. You can bet that S&P and Fitch are not far behind…. which by the way – is NOT helpful at all, only adding to the broader angst for markets.
As noted, – European markets are lower…. it’s the same issues…. higher rates for longer and concerns over sticky inflation. German 10 yr. bunds – like US 10 treasuries – hit their highest level in a dozen years…. Eurozone yields also climbed – as investors there await more inflation data that will set the path forward for the ECB. At 6:15 am – all the markets are down between 0.1% – 1%.
The S&P ended the day at 4337 – up 17 pts….…. and this morning it looks like it’s going to take back some of those points….as investors try to decipher what is next. The end of the quarter is only days away – and then we enter the ‘Jinx zone’ (October) – which can also be a volatile month for stocks. Now remember – I said it yesterday on the Claman Countdown with Cheryl Casone – when markets gets antsy and investors get worried – the path of least resistance is lower….Good stocks get arbitrarily dislocated because asset managers and retail investors use them as ATM’s – withdrawing cash as needed….and that is where you will find great opportunities…Just sayin….I mean – buying MSFT down 15% or 20% is a bad idea? (It is currently off 14% since the July high…. oh, boy…patience IS a virtue).
Do not forget the second GOP debate – this Wednesday evening – taking place at the Reagan library and hosted by Fox Business. Dana Perino, Stuart Varney, and Telemundo’s Ilia Calderon. The field is shrinking…participants now include – Burgham (who just qualified), Christie, Pence, Ramaswamy, Haley, Scott, & DeSantis.
Take good care.
Chief Market Strategist
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“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.
Pumpkin/Butternut Squash Risotto
It’s that time of year again and you see pumpkins all over the place, the air is brisk so try this great hearty dish. Easy to make because you BAKE this one and it is delicious to eat……
You will need: Chicken Broth, Arborio rice, Butternut squash, 1 1/2 cups of pumpkin puree (not the pie filling that you buy in the store – you need real pumpkin puree), large diced onion, chopped fresh basil, plenty of fresh grated Parmegaina Cheese, olive oil – and the kicker – 3 tblspn of Mascarpone Cheese. – (Mascarpone is a soft white cream cheese from the Lombardy region of Southern Italy. It is the result of the culture being added to the cream skimmed off the milk used in the production of Parmegiana. It has the consistency of soft cream cheese and is used in a variety of Italian dishes including deserts)
Preheat the oven to 400 degrees.
In a baking dish – combine the rice, cut up butternut squash, the pumpkin puree, diced onion, and the chicken broth. Season it with a bit of s&p and mix well. Cover it tightly with a lid or with tin foil and place it on the middle rack in the oven. Re-visit it in 10 mins intervals and stir. It will be done when most of the broth has been absorbed and the rice is no longer hard. This should not be cooked any longer than 40 mins max.
Remove from the oven and add – the Parmegiana, the Mascarpone and the chopped basil – mix well (but do not smash the butternut squash) and serve immediately in warmed bowls.
Buon Appetito
