CPI? (Yawn!) FED Steady (Yawn), More Eco data likely to do Nothing to Psyche – Try the Tomato Salad Fritters.

Kenny Polcari Uncategorized

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Things you need to know.

  • CPI was a bit hotter, but investors appear to be OK.
  • PPI and Retail Sales Today…. Will that change the mindset?
  • UAW counting down to 11:59 pm – then what?
  • ARM – priced at $51 – Any bets on the opening price? Investor interest is supposedly 10x’s oversubscribed…. How aggressive with buyer be?  And the AI Frenzy continues….
  • Try the Tomato Salad Fritters

So, after all the hype, all the analysis and all the angst – what did the CPI do?  Well, it was up…it was up on the top line, and it was up when you take out all the volatile elements – like food energy it was in line….and if you take all the elements out – guess what it would be?  Zero!  Amazing how that works, no?  Then we would have no inflation, nothing to worry about – so why don’t they just create a new category and call it the CPI of nothing……problem solved!

In any event – let’s be serious….m/m on the top line – it was +0.6% (in line with expectations), m/m – EX food and energy were +0.3% higher than the expectation of +0.2%.  When we go to y/y figures – we find that the top line came in at +3.7% – up from +3.2% last month and higher than the already elevated estimate of +3.6%. And when you take out food and energy – the y/y print came in at +4.3% – right on target….and down from last month’s +4.7%.   Ok – so what does it all mean?  Are prices going up or down?  Well, both!  Can that be possible? 

Sure…. the stuff you don’t need every day to survive is seeing some price relief, but the stuff you do need every day to survive is not seeing any relief – inflation in those sectors remains ‘sticky’ (think food, energy, utilities, healthcare) … But – as discussed yesterday – they want you to focus on the EX-category…of course they do, that’s where you see all the prices of the stuff you DON’T need seeing some relief…. Also, do not ignore the fact that average weekly earnings rose by 0.3% BELOW the pace of inflation at +0.6% and all that means is that the average hourly worker is falling further behind – as his income fails to keep up with the pace of inflation….but – let’s not worry ourselves about that….. 

So, it appears as if the September FOMC meeting is in the books…. rates to remain steady….no hike…and the November meeting?  Well, that’s still 50/50….and December appears to be below 10%…. So, maybe this is the peak?  Could that be possible?  For today it is….but I wouldn’t go betting the ranch on that….…..at least NOT yet…which doesn’t mean get out, it just means proceed with caution because my sense is that the ‘sticky part’ will remain ‘sticky’ and that is going to cause the FED to do one of two things. 

1. Go back to raising rates or

2. Accept it and then move your inflation target from 2% to 3%. 

Now if they go back to raising rates then we can see bond yields jump to 4.5% in the 10 yr. and something like 5.2% for the 2 yr.  If they choose to raise the acceptable inflation rate (and do nothing on rates) then I think bonds will settle in here….4.3% on the 10 yr. and 5% on the 2 yr.  Shorter duration bonds will remain yielding 5.5%.  And that will continue to be a headwind for stocks – for now…. You see, what has to happen is that investors now have to get used to the new paradigm.

Yesterday saw stocks all over the place – but not with any conviction…meaning – the traded just north and south of the unchanged line – without making a definitive decision. By the end of the day the Dow lost 70 pts, the S&P gained 5, the Nasdaq added 40, the Russell lost 15 and the Transports added 26 pts.   And what that tells us is that maybe investors are ‘ok’ with this and are starting to focus on growth – (think tech) now that it appears we might be peaking on rates.  The growth trade – SPYG gained 0.25%, while the value trade – SPYV was flat.  On the year, the growth trade is outperforming the value trade 2:1….

Of the 11 broad sectors – Industrials, energy, basic materials and real estate ended the day lower….while Tech, Utilities, consumer discretionary and consumer staples, healthcare and communications all ended the day higher…..and once again – I point to the utility sector……the XLU rallied by 1.2% (the best performer on the day)- a decent move for what is considered a boring ‘not sexy’ sector…But remember – this is an important sector (as it offers insight into what investors are thinking about what the FED will do and it is the ultimate defensive play)  and while the group was off 13% ytd as of last week – it has since gained 5% (individual names even more) as investors are betting that rates have peaked but  volatility maybe not.  Capisce?  Now, while it is still the worst performing sector this year, it is worth keeping your eye on.  NEE is one of my favorite names in the sector….It got slammed this year – down 22% as of last week….but it feels like it bottomed out and has since gained 5% in the past week as the rate hike story unfolded….Now, I’m not saying its all wine and roses – I’m just pointing out an opportunity.

Ok – so what about today?  Well at 8:30 we are going to get the August PPI (Producer Price Index) – the price producers have to pay to produce the stuff we buy…and that too is expected to be UP….but does not appear to be causing all kinds of angst….it appears that the FED has been able to keep investors calm and focused….  We are also going to get Retail Sales – and they are expected to be lower…suggesting lower prices on some items…and that would be a big shift from last month that saw big increases in retail sales – which suggested higher prices across the board…..You see – retail sales are up when you spend money…and when you spend more to buy less – is that really suggesting the consumer is strong or does it suggest that the consumer has no choice? Therefore, when you spend less money to buy more – then that falls in line with declining prices – which is a positive.  Initial jobless claims of 225k would be UP over last month, while continuing claims are also expected to be higher….and that suggests a slowing (weakening) of the labor market…

We are also going to hear a lot about the UAW strike – that appears to be only hours away….11:59 pm tonight…. UAW President Shawn Fain telling us that.

“To win, we’re likely going to have to take action. We are preparing to strike these companies in a way they have never seen before…”

He is suggesting ‘targeted strikes’ rather than an all-out strike – creating all kinds of confusion….and while acknowledging that they are making progress – they are still very far apart on KEY priorities…. let’s see how that works out….

And the ARM IPO – yes, it will be all very exciting….they priced the deal at $51/sh – while telling us that it is 10 – 15 x’s oversubscribed…..which means – if that’s true – then we will see a significant pop in the stock on the open (50%?) – and that will depend on how much of a frenzy they can create…..…. Now, they do that for exactly one reason – they would love to see it surge – that would only add more hype to the AI story, and it would reward those players that supported the deal…. It then would cause more investors to want ‘in’ creating a buying frenzy…….  On the other hand – it reflects how much money they left on the table…. which is an issue for some, but when Masayoshi Son still owns 90% of the stock – does he really care?  No.  But you can bet that if he was selling his total position, he would care how much they left on the table…In any event – expect this to drag on all morning….as Nasdaq tries to get it right.

US futures this morning is all up…. Dow futures +85, S&P’s up 14, the Nasdaq up 50 and the Russell up 8……I think – this action is more relief that the CPI was not hotter…. but I continue to think that it feels toppy…. We remain below the trendline at 4480 and I expect that if we test it again today – we will also fail.  I remain in the camp that we churn lower over the next 4 weeks – before the start of earnings season…. but at worst will find support at the intermediate term trendline – which right now is 4356.

This morning oil is trading at $89.20…. Gold is trading down $5 at 1927 all while the dollar index is holding tight at $104.76.

European stocks were weaker but have since turned up…. Italy lagging – only up 0.1% with the UK – way out in the lead. +0.9%.  Investors there preparing for the ECB and the BoE policy moves…. Right now – it appears to be split…on a hike or no hike.  Evidence is building that a recession is coming….and the surge in oil prices is not helping the inflation story…. Sit tight…. more to come.

The S&P ended the day at 4467, up 6 pts.  We remain below trendline resistance, and I continue to believe that will be the case until we enter earnings season.  The hotter CPI figure did little to rattle investors and the sense that the FED is holding rates steady appears to be ok……I think investors are tiring a bit….and while I expect some near term weakness – I am not expecting a big sell off….In the end – I think we end the year around 4500 on the S&P. 

Take good care,

Chief Market Strategist

“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.


Chef hat, knife, and fork icon

Tomato Salad Fritters

These are delish….and so easy to make. Use them as an appetizer at your next informal party.

For this you need. Tomatoes, flour, a block of FETA cheese, red onion, baking soda, fresh mint, dried oregano s&p….

Dice the tomatoes (not tiny, but diced) you need about 2 ½ cups, slice the onion, chop the mint, and place all of this in a large bowl. Season with s&p and the oregano.

Next add the FETA cheese – crumble it.  Next add 1 c of flour and ½ tsp of baking soda.  Mix well so that the tomatoes are all coated, and the mixture is thick.

Add vegetable oil to a deep pot…enough to deep fry the fritters.  Using a large spoon, drop the batter into the oil and deep fry it until it becomes golden brown – won’t take long.  Remove and place a paper towel to drain excess oil.

Serve these with fresh Tzatziki sauce…. (Buy that at the grocer or your favorite Greek restaurant).

Buon Appetito