Things you need to know.

–        Inflation continues to cool – reigniting the rate cut demands.

–        Former FED President changing the equation to make his case – but he is a ‘Former President,’ so he has nothing to really say, other than ‘leak’ FED thought?

–        The Hootie’s launch a drone attack on the Americans and Iran says they had nothing to do with it! The country awaits a response by Jo Jo

–        It’s a BIG week for ‘tech’ and for the economy….

–        Try the Breakfast Oatmeal

So inflation in the US appears to have notched another ‘month of  mild’…..leaving the trader types to reignite the rate cut narrative all over again…..while the FED deliberates the next move this week…..Traders now saying that the narrative is no longer a question of ‘will they’ but rather ‘when will they and how quickly will they’…. Something I think is a big mistake – but hey – I’m not on the committee.

In any event the FED’s favorite inflation gauge – the PCE deflator came in at +0.2% for December and +2.6% y/y…. while the Core PCE (Ex food and energy) came in at + 0.2% and +2.9% respectively.  Now those numbers are indeed good, but still remain above the 2% target.  But just for more emphasis – Nicky ‘T’ of the WSJ – aka “Deep Throat’ makes a point of trying to show what a big deal this is – comparing Friday’s read with the PCE in December of 2022 – when it rang the bell at +5.4%.  I ask – “Hey Nicky – what was the PCE deflator in December 2020?” It was 1.1%, which paints a very different picture and allows for a different conclusion, no?   Ok – point made – let’s move on….

And then we got Chucky Evans – Former Chicago FED President who is in the ‘rate cut camp’ (but clearly does NOT have a vote) tell us that if you use just the last 3 months of readings and annualize it – then – then the number is 1.5% while the 6-month average is 1.9%……saying

“It’s really amazing that these 3- and 6-month inflation rates are below 2%.

See how they change the direction of the conversation…The accepted calculation shows inflation still running above target – but if you change the inputs and change the time frame, suddenly the inflation rate is below the target…amazing how that works….and if you use just the month of November – which showed a -0.1% decline then the annualized rate is -1.2% which takes us into ‘deflationary’ status….and THAT is even better….and that would definitely force the FED to cut and cut big…..in order to stop the deflationary spiral….but I digress….

In the end – investors (really the trader types) are expecting rate cuts (plural) this spring – yet FED officials remain worried that cutting rates prematurely will only fuel demand which will then fuel inflation all over again forcing the FED to reverse course and raise rates.  And by the way – can someone tell me where they are seeing lower prices?  Because they aren’t happening at the grocery store, at the insurance counter or the doctor’s office. And my electric bill?  Yeah, not happening their either…leaving me to ask – Does the average American feel these lower prices? 

Now, if you want to buy a used car – or even an EV – you can find better prices…. but how often do you do that?  Mortgage rates?  Yes, they have come down from the highs in the fall, but they are still 150% higher than they were in January 2022.  – So, while 7.25% is better than 8%, it’s a far cry from 3% (which by the way wasn’t normal either – just to be clear).

In fact – what I will say is that prices for the things you don’t need on a daily basis are coming down…but is that really helping the average American? 

In any event – stocks were mixed on Friday in what I think feels like a bit of exhaustion -the Dow gained 60 pts, the Russell added 3 pts and the Equal Weighted S&P rose by 1 pt while the S&P lost 4 pts and the Nasdaq gave up 56 pts. In the end – it was a non-event type of day…nothing really dramatic….

Tech – XLK came under a bit of pressure losing 1.15%, Real Estate gave up 0.45%, and the Industrials – XLI gave up 0.15%.  The other 8 sectors gained- with Energy – XLE rising the most +0.75%, Healthcare – XLV up 0.6%, Consumer Staples – XLP and Consumer Discretionary – XLY both up 0.5%, Financials – XLF +0.4%, Utilities – XLU +0.3% and Basic Materials – XLB unchanged.

Further down the line we saw Semi’s – SOXX lose 2.7%, Disruptive Tech – ARKK gain 0.25%, Aerospace and Defense – XAR +0.2%, Coal names +1.2%, Biotechnology XBI down 0.4%, Retail – XRT +0.56%, Airlines – JETS -0.5%, Homebuilders  – XHB – unchanged, the value trade – SPYV up 0.1% while the growth trade – SPYG lost 0.25%. The VIXY (fear) ETF lost 1.1% while the VIX index gave up 1.4% after trending higher earlier in the day. And the decline in the VIX suggests complacency….and you know what that means…. Watch out!

Now over the weekend that complacency got tested and will get tested today and beyond…..A drone attack – launched by the Hootie’s (Iran) killed 3 US service men in Jordan and ‘now marks a major escalation of tensions in the middle-east’…and the pressure is mounting on Jo Jo to do something,  and while he has pledged to retaliate many are left wondering who is really making that decision?  Iran’s Foreign Ministry spokesman Nasser Kanaani tried to temper the news saying that ‘resistance groups in the region do NOT take orders from the Islamic Republic of Iran in their decisions or actions.’ and that the idea that Iran was involved in this attack is ‘baseless’…. Ok…What’s this guy a comedian?  And to this I ask – Is there anyone (outside of that region) that believes that statement? I mean, come on! It has Iran’s fingerprints all over it….

And this caused oil to rise initially when trading began overnight….…. ticking as high as $79.30/barrel before returning to trade at $78.  This on top of the 8.5% rise we saw last week to end Friday at $78.23/barrel. News that Xi Xi is stimulating the Chinese economy (think increase demand), and crude drawdowns here in the US, along with the OPEC+ pledge to cut production helped to support the price of oil last week…….The cuts in production and cuts in exports that OPEC+ promised, coupled with the conflict across the middle east has helped oil trade higher…..and while they (OPEC) are due to have a ‘zoom’ call this week to discuss – there is no further change expected. Alex Novak – Russian Deputy Prime Minister told us that ‘the oil market is balanced now thanks to OPEC +’s actions – that’s why the situation is under control.’  Oh, is that what you call it?  Under control?  Got it.  Notice that oil is approaching the Saudi’s minimum preferred price – $80

Bonds churned in place – not doing much leaving the 2 yr. yielding 4.34% and the 10 yr. yielding 4.13%.

Gold is up $11 this morning at $2,047/oz….as gold traders continue to consider the mixed US data and what that means for the FED’s decision on Wednesday this week. And let’s not kid ourselves – it is getting a boost from the uptick in tensions across the RED Sea region (think safety trade)……Recall that Gold has been testing the lower range ($2,030) as bullish bets declined on the idea that the FED would not lower rates as expected….– higher rates are a negative for gold while lower rates are a positive.  The move in gold though, over the next couple of days – will be (in my opinion) more directly tied to what (if any) the US response will be to the drone attack on the US servicemen.  Gold remains in the $2,030/$2100 range. 

Eco data this week includes Housing Price data (non-event), Conf Board Consumer Confidence reads – they are expected to be up (bullish), but I also do not believe that they will be the driver either.  The JOLTS reports, Dallas Fed Survey, Mortgage Apps, Challenger Job Cuts and Construction Spending will round out the chorus –

But the stars of the show will be Wednesday’s FOMC rate GUIDANCE (not the decision) – will JJ lay out a plan or will he leave it open to interpretation?  My gut says that he will not paint himself into a corner – but that does not mean that the market won’t! There is no cut expected this month, but there are all kinds of speculation about a March cut (odds now 50/50), with a May cut at 80/20.  Data last week showed that inflation continues to cool, all while consumers continue to spend yet many are now wondering what effect the conflict in the middle east may play in the FED’s next move. Think inflationary and supply chain issues as shippers are now taking the long route around the tip of Africa rather than through the Suez Canal.

Look – you know what I think…. A strong robust economy can handle 5.25% rates….I mean – they’ve been at that level for months now and the economy does not appear to be gasping for breath…..and historically – 5% rates are normal….So why the drama? 

And then on Friday we get the January NFP report….and that is expected to show an increase of 180k new jobs created, Unemployment is expected to tick at 3.8% while Avg hourly earnings are expected to be up 0.3% m/m and 4.1% y/y.  

On the earnings front – it is a BIG week – 20% of the S&P is due to report – that’s 100 names – and the ones to watch include 5 of the 7 ‘magnificent techies…. – MSFT, APPL, META, AMZN, & GOOG…. This week will be all about AI and the role that these tech leaders are playing…. My sense is that after the Taiwan Semi and ASML reports – we can expect to hear exciting forward guidance from the group…. If we don’t then watch out….

You can catch my appearance on Varney & Company from Friday – where Stuart and I discussed this very point.  Click on link below:

https://www.foxbusiness.com/video/6345637021112

In addition, we will hear from a bevy of other names BA and MRK – both Dow names along with UPS, ADP, BSX, HES, ROK, BDX, CLX, RCL, SWK, and the list goes on….

This morning Dow futures are mixed:  Dow -40, S&P’s +2, Nasdaq +30, and the Russell is -1.  The VIX shot up by 5.4% when trading began but has backed off just a bit and is now up 3.8%.   Markets are trading very cautiously….ready to react at any moment if the tensions in the middle east flare up….but remember – those types of issues do not price stocks in the long term, they do though, create chaos in the short term and that chaos can prove to be an opportunity. 

Stocks in Europe are mixed as well…. The UK and France are slightly higher, +0.1% while Germany, Spain and Italy are lower by about 0.7%.  The mood there is one of caution as well….Caution over the geo-political issues as well as the FED statement….Investors across the zone are ramping up bets that the ECB will begin to cut rates in April – although Christine Lagarde said that it was ‘too early to talk about cuts’….But do you see how the market hears what it wants to hear rather than what is being said?

The S&P closed at 4890 up 4 pts….….as the momentum carries us higher and higher…. All on the idea that the FED and other global central banks are preparing to cut rates….In the event that the FED makes it clear that while they are considering all options – there is no plan to cut rates at a specific time or by a specific amount – I would expect some of the air to come out of the balloon – and you should too.  Now if they suggest that cuts are coming (definitely coming) then we can expect that the algo’s will continue to push stocks higher…

The S&P is up 20% off the October lows – without as much as a 3% pullback…during the past 12 weeks…so don’t panic if we see some weakness post the FOMC meeting.  In fact, I am rooting for some weakness – but am not sure we will get it this week due to all of the events taking place….

Look – I can’t emphasize it enough….do not be surprised by some event that disrupts the move up….do not be surprised if we suddenly hit a wall….and back off…Know what you own and why own it – build a portfolio with a theme….give me a call to discuss.  

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

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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, which may not necessarily align with our firm’s standpoint.

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Breakfast Oatmeal….

This is a family favorite – it is Puerto Rican style oatmeal, and it is more like a desert rather than a breakfast – but once you have it, you’ll understand.

For this you need:  Quick Quaker Oats, 1 small can of Carnation evaporated milk, one can of water, less than 1/8 tsp of salt, sugar, vanilla extract, maple syrup (optional) and milk (whole or 2% – whatever you have)

Start by adding the evaporated milk and the water.  Add the oatmeal, salt, the sugar, and vanilla extract.  Bring to a boil then reduce heat to low…. Stirring constantly….

Now as it cooks it will get thick – this is where you add in the milk – to ‘thin it out’….and this is where you can add in a ‘shot’ of maple syrup (optional) as well.  Taste to adjust (the sugar) if you need to…Continue stirring and it will begin to thicken again…Add another shot of milk, let it combine with the oatmeal and then serve in bowls….  Yummmmy!

When I eat it, I add a tablespoon of Skippy Chunky Peanut Butter -Mmmmm.  Enjoy