Things you need to know.
– CPI is only moments away.
– Yesterday’s PPI was HOTTER and STICKIER
– FED Mins reveal a split.
– Investors piling into the safety trades – Bonds and Gold
– DAL joins PEP – and reports ‘better than expected’ – HELLO?
– Gold UP, Oil UP, Dollar Down
– Try the Puttanesca
The day began when the gov’t reported the September PPI – and while it was expected to be HOT the reality was it was even HOTTER than the already elevated expectation……so that’s an issue……PPI m/m came in at +0.3% vs. the 0.2% expectation and y/y was +2.2% vs. the +1.6% expectation and when they took out volatile food & energy – the y/y number came in at +2.7% – vs. the +2.3% – that was 17% higher than expectation…..In addition last month’s y/y reads were revised UPWARDS as well….so that’s an issue too.
And then at 2 pm the FED released their minutes from the last meeting….and that revealed that FED officials were split over what to do next…. Were they prepared to raise rates again or not, were they prepared to hold them higher for longer or not….
Well, the minutes laid it out like this.
“A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate while some judged it likely that no further increases would be warranted.”
Great! So now what? Well, they can now point to the swift rise in long term rates as having done some of that work for the FED – leaving them the ability to sit tight (pause).
Fed Governor Chris Waller said it clearly yesterday at a conference in Park City, Utah….” Financial markets are tightening up, and they are going to do some of the work for us. We’re in this position where we kind of watch and see what happens on rates.”
Well, I guess we have to say – that the financial markets (bond markets) HAD been doing the work, we saw 2, 10 and 30 yr. rates rise swiftly – talk of a 5% 10 yr. was the conversation – this after the 30 yr. kissed and pierced 5% last week….but then we got the conflict in the Middle- East over the weekend – that is now in its 6th day…..with no end in sight – and that has caused a flight to safety – sending bond prices UP causing yields to come down…..the 2 yr. this morning is yielding 4.99% and that is down from 5.15% last week, the 10 yr. move has been even more dramatic, this morning that bond is yielding 4.56% and that is down 30 bps since last week’s high of 4.87%….a 6% decline in yield….this as US and global investors are finding ‘safety’ in the US treasury market…..The TLT – the 20 + yr. treasury bond ETF rising better than 5% since Monday….but remember the bond market has gotten slammed this year…that etf down more than 16% ytd coming into the week – so you could also argue that it was overdone on the downside…providing an opportunity for investors. In any case, the move up in bond prices has caused yields to decline – so now what? Does this mean the FED will have to reconsider a November move?
Recall yesterday we discussed how the FED has worked very hard to convince the markets (and investors) that they were leaning towards another pause (it’s called jawboning – it’s the attempt to persuade or pressure an idea by force of one’s position of authority) – they had most of the regional FED presidents and FED governors pushing that narrative – they even ‘leaked’ that to Nicky at the WSJ….…….the only real outlier, the one that didn’t appear to be convinced was Mishy Bowman….she remains steadfast in the idea that while we have made some progress, she is not convinced the FED is done raising rates….
In the end – what they decided was that if the bond market did the work, then they didn’t have to…so now – we have to see what the bond market is going to do…. A decline in bond yields is NOT going to help…. Capisce? Yet, Fed fund future bets on a hike or not soared yesterday….they are now putting a 9% chance on a rate hike (thus a 91% chance of no hike) in November and a 28% chance of a hike in December (thus a 72% chance of no hike) and that is up sharply from yesterday morning’s bet.
And that leaves today’s CPI report – due out at 8:30 am….Now the expectation is for m/m and y/y numbers to be lower than last month…..but after yesterday’s stronger PPI report, it is difficult to see how today’s CPI report could be anything but HOTTER….and if it is weaker – that will cause many to question the data…Let’s be clear – if costs rise at the producer level, then the logic tells you that the producers pass on those higher costs to who? The consumer…and the CPI is all about the consumer…. Now that is unless the producers choose to eat those higher costs and NOT pass them on, but come on – really? Does anyone really think that producers are going to ‘risk’ squeezing their profit margins only to watch investors run for the exits?
All you have to do is look at what PEP reported….they beat on both the top and bottom lines…they were giddy to tell us that the recent price increases helped to ‘carry them thru’….well, of course they did – the recent price increases allowed them to keep their margins strong….in fact, they pushed prices so much that the ‘extra’ is what flowed to the bottom line…Capisce? This is not rocketing science…. folks…it’s simple math… in fact it’s not even college level (calculus) math – its simple 2nd grade math. For example – if it costs $3 to make and they charge $5 then $2 flows to the bottom line, ($5-$3) but if costs rise to $4 (a 33% increase) and they raise the price to $7 (a 40% increase) guess what? Do the math…. it’s not complicated – $3 falls to the bottom line…. ($7-$4) and that equates to a $1 more in the bottom line or a 50% increase….and that increase protects their margins…and that protection allows them to release this statement –
“Driven by strong results and business momentum, the company raised its core constant-currency EPS view for 2023.”
Yeah, they raised their core constant-currency EPS because they raised prices (or shrunk the containers and kept prices the same – which is really a hidden increase) – think of it as a ‘tax’ on the consumer…. which is exactly what inflation being – a tax on you and me. But whatever….it is what it is…
Now – stocks initially rallied strongly out of the gate yesterday morning even as the PPI came in hotter – the S&P as I suggested in yesterday’s note – ran right up to trendline resistance (4385) and failed…..at the end of the day – the Dow – ended up 65 pts – but this after being up more than 200 pts earlier in the day. The S&P up 18, leaving it 10 pts below trendline, the Nasdaq added 97 pts the Russell lost 3 and the Transports gained 50. This as investors digested the stronger PPI report and parsed thru the FED minutes…. The big TECH boys – outperformed and part of this is because of the pressure they have been under recently…. AMZN + 1.8%, GOOG +1.8%, MSFT +1.3%, NVDA +2.2%, META +1.8% etc.
AT the end of the day – it was Consumer Staples, Energy and Healthcare that ended the day lower….while Real Estate – XLRE gained 2.2%, Utilities – XLU + 1.6%, Tech – XLK +1%, Communications – XLC +0.9%, Basic Materials and Consumer Discretionary both gained 0.4%, while Financials carried up the rear – rising just 0.2%..
The contra trades ended lower – the VIX – fear index – which had surged higher in the last couple of weeks – fell by 5.5% to end the day at 16.09 – and is now down 24% since last week….thus the move up in stocks…..the VIX is a bit lower this morning and that is giving life to US futures – Dow futures + 115, S&P’s up 16 – and if that holds – then we will bust up and thru resistance, the Nasdaq up 60 and the Russell is ahead by 14…..Clearly the market is thinking two things this morning……. First that the CPI is not going to surprise and second – the FED is definitely pausing….those are the only two reasons that we would see this kind of action today….My caution is that we have not seen the end of ‘sticky inflation’ or higher interest rates….which means – don’t let anything surprise you – stick to the plan.
DAL just reported and guess what? They BEAT!!! Profit jumped by 60%…. of course, it did…. Did you see what they did to prices? Oh boy……DAL now wants $550 to fly from West Palm To NYC….and that only gets you a reservation…then you have to select your seat (another $80) and then pay for a bag if you are checking it (another $35) and if you want to pre-board – that will cost you another $25 – so that’s $700 and then you have to still pay taxes on all of that….and don’t forget – they aren’t flying wide bodies to and from….they are 3 x 3 and barely any leg room which allows them to squeeze more people into a smaller ‘container’. How’s that working for you? And the stock is quoted up 2% in the pre-mkt.
Oil is trading up 60 cts at $84.11 after falling yesterday on the back of the API report…. It showed that US crude oil stockpiles ‘swelled’ by almost 13 million barrels – which was about 12.5 million barrels MORE than the 500k barrel expectation. Refinery maintenance (shutdowns) though is being cited as a reason for the outsized build. Gas inventories also rose by 3.6 million barrels vs. the 800k expected increase and that is suggesting (or at least they tell us) that consumers are at their pain point…and cutting back on consumption…something I do not – for one minute – believe….I just don’t…Today, we’ll get data from the EIA – let’s see what they say. We know how that story changes from Monday to Tuesday.
Gold – continues to push higher (think a safe haven asset) …. this morning up $7 at $1894/oz – think geo-political tensions and a weaker dollar…. on the back of the FED commentary suggesting another pause. We are now only 26 pts below trendline resistance. The dollar index is now trading at 105.66 – down 20 cts from yesterday……and likely going a bit lower on the pause commentary– remember – trendline support is at 104.62.
European markets are all higher…. ECB officials – like the FED officials are all singing the same tune…. rate hikes have peaked……which then puts them in pause mode and that is what is sending markets higher…. All the markets across the region are up by more than 0.6%.
The S&P closed at 4376 – up 18 pts and there is a real possibility that we will kiss and pierce trendline resistance at 4385 (We have to see the CPI report at 8:30 first though) …. If we push thru that and then push thru short-term resistance at 4410 – then it is off to the races……testing levels last seen in late August…. think 4500 ish.
Which again – only supports my point as a long-term investor – stop with the trading mentality…. put on your investor mindset and stick to your plan…don’t try to pick tops and bottoms, build a strong, diversified portfolio.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Kenny Polcari is the Chief Market Strategist for SlateStone Wealth. Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.
We need something tangy and spicey…Try the
Linguine Puttanesca
As many of you may know this dish originated in Naples and is today a staple of the Neapolitan household. It is made from tomatoes, black olives (or Kalamata Olives), capers, anchovies, onions, garlic, oregano, and parsley. It is easy to make and has an interesting history.
Whatever its origin, it is a great dish that is easy to prepare – is spicy, tangy, and vibrant – an appropriate description of the mkt today…
Start with 3 crushed garlic cloves sautéed in olive oil for about 3 / 4 mins…do not let it burn… next add a diced white onion and diced/minced anchovy filets and sauté for another 5 / 8 mins. – as they cook, they melt away. Add one can – 28 oz – of kitchen ready crushed tomatoes… not puree – Crushed. Add about 1/4 of a can of water – Let simmer for 10 mins or so. Next add capers, oregano, pepper, chopped Italian parsley, and rough chopped pitted Kalamata olives or pitted black olives – whichever you prefer – but do not mix… It is one or the other. No need to add salt as the anchovies are salty enough. If you like more bite, you can add red pepper flakes at this point… cover and let simmer.
In the meantime – bring a pot of salted water to a rolling boil and add the Linguine or spaghetti. Do not use Capellini as it is too thin, and it clumps up etc… Let boil for 8 mins or until aldente. Remove and drain – keeping a mugful of the pasta water. Add the pasta to the sauté pan with the Puttanesca sauce and heat and stir until well coated and fragrant. Serve immediately onto warmed plates offering up grated Parmegiana cheese on the side.
Buon Appetito
