Things you need to know –
– PCE did WHAT?
– Super Core did WHAT?
– Traders BET that a June cut is alive and well.
– Oil up, Gold up, Bond Prices up and Stock Prices up.
– Try the Dover Sole Francese
Que pasa? So, all that angst for what? For naught. PCE deflator was spot on……yes it was elevated but it was expected to be elevated – so guess what? Well, since it wasn’t any worse – the narrative is now once again about the coming June rate cut……But – here’s the issue – conveniently buried in the data (because it does not support the June narrative) is what happened to the Super Core PCE Deflator? Essentially – what’s happening with the ‘stickier parts’ of inflation (Hint: it isn’t good.)
Recall that the ‘Super Core PCE Deflator’ is the – basket of goods and services MINUS the food and energy inflation and MINUS the housing inflation. That is the key to Super Core – taking out the housing data – because it tends to lag and supposedly does not give us a ‘true’ reading.
Ok – so what was the Super Core number? Well, it EXPLODED higher m/m – going to +0.6% (actually 0.596%), and is back to kissing the highs seen in December 2021….Now recall what the inflation rate was then – CPI was 6.7% – on it’s way to 9.4%…..And all this says is that the FED is no where near its stated goal of 2%…in fact – they are moving further away from that goal.
Now what is interesting – the FED was happy to sing the praises of the Super Core rate WHEN it supported the narrative….think July 2022…When the CPI rate was 9.1% and the Super Core fell from 0.5% to 0.15% – allowing them to say that the Super Core was a leading indicator and that suggested that the CPI was about to turn down…..Which it did…..So, does a jump in the Super Core rate suggest that inflation is about to turn up? (Which it IS doing?) And if so, why is everyone so ‘mum’ on the issue? Simple – because it does not support the rate cut story…Period, the end. And because they are trying to keep the calm and not cause markets to ‘sell off.’
Look – the wait and see approach has proved to be the right strategy and I think should STILL be the right strategy….cutting rates now – when the inflation rate remains well above the target is not the best idea, yet yesterday’s data seems to suggest (to some) that a rate cut is not only needed, but is now on the June table. The ‘hotter’ PCE read, and the ‘hotter’ Super Core read apparently ‘restores confidence’ in the not IF, but WHEN do rates go down. Krishna Guha – Head of Central Bank Strategy at Evercore puts it this way –
“The PCE report contains no new bad news on the inflation dynamics, with June remaining a solid bet for the first rate cut.”
Jamie Cox – of Harris Financial Group says that ‘concerns are overblown’ and Chris Larkin at E-Trade thinks the report eases any doubts about the fed ‘digging its heels in and keeping rates higher for longer.’
And while I hope these guys are correct – it is necessary to note that neither one (Jamie or Chris) was alive in 1979 – 1981 when we experienced out of control inflation because the FED prematurely cut rates thinking they slayed the monster. But that’s another story…. let’s move on….
So, what did stocks do? They swung both up and down only to end the day and the month in the plus column. At 4 pm – the Dow had tacked on another 47 pts – leaving it up 3.5% ytd, the S&P – up 26 pts – leaving it up 6.8% ytd, the Nasdaq added 145 pts – leaving it up 7.2%, the Russell added 15 pts – leaving it up 1.4%, the Transports gained 135 pts – leaving it slight negative on the year at -0.3% while the S&P Equal Weight gained 33 pts – leaving it up 3% ytd.
The best performing sector yesterday was – TECH! Go figure! The XLK +1.1%. Up next were Communications – XLC & Real Estate – XLRE both up 0.8%, followed by Basic Materials – XLB + 0.75%, Consumer Discretionary – XLY + 0.7%, Energy – XLE + 0.5%, Industrials – XLI + 0.3%, Utilities – XLU flat, Financials – XLF – 0.1%, Consumer Staples – XLP – 0.2% and Healthcare – XLV – 0.8%.
Further down the chain – Housing – XHB +0.8%, Retail – XRT +0.7%, Airlines – JETS +0.25%, Disruptive Tech – ARKK + 0.2%, Metals & Miners – XME + 1.7%, Cybersecurity – CIBR + 1.4%, Semi’s – SOXX +2.7%, Energy Exploration & Production – XOP + 1%, The Growth Trade – SPYG +0.8% and the Value Trade – SPYV flat.
Bonds rose on the back of the ‘good news’ – the TLT and TLH both up 0.6% sending yields a bit lower…the 2 yr. is now yielding 4.59% down from 4.74% only 4 days ago and the 10 yr. is yielding 4.23% down from 4.34%. Some of the most recent strength being credited to end of month bond rebalancing.
Knock, knock – Anyone home?
And what was interesting – investors/traders and algo’s chose to completely ignore yesterday’s FED speak – San Fran’s Mary Daly (for what her opinion is worth – think her role in the SVB debacle) said that while the bank is ready to lower rates – there is ‘no urgent need to cut give the strength of the economy’ while Raffi – repeated his call for patience and Cleveland’s Loretta Mester said that the data shows that ‘policymakers have MORE work to do.’ – So, none of that suggests to me that there is any reason to change course – which is why I remain in the NO cut camp. But as I told you – I am not on the committee….so my vote doesn’t count!
Oil prices are UP $1.30 or 1.6% this morning….at $79.54 – once again kissing that magic $80 number that the Saudi’s need……Kuwait crude exports ‘slumped’ in February as per the OPEC+ limits, overall flows out of the Persian Gulf dropped by 9.5% m/m and represents the lowest level since October 2016!
In addition – a breakdown in ceasefire talks in Gaza were complicated by more than 100 Palestinian deaths – the cause of the deaths is in dispute and will only further complicate the ceasefire talks and that only raises the tension in the oil patch. And if that is not enough – China reports that manufacturing activity contracted for the 5th month – suggesting that Xi XI will have to roll out stimulus measures and that is expected to ‘stimulate demand’ (for energy) – now that’s a stretch, but that’s what they want us to believe….rather than the fact that energy demand is expected to grow – Period….And if you say, EV’s and Alternative energy will solve the problem, here’s a tidbit….EV’s and data centers & bitcoin miners are draining more energy off the grid, faster than we can supply it, they suck it out and that is expected to grow – so anyone that thinks energy demand is going away needs to wake up….The sun and wind can not support the energy needs of the world. So, get off that bandwagon. Oil remains in the $75/$85 range.
Gold shot higher on the back of the PCE data and the interpretation about what it meant, and gold traders are betting on a rate CUT…. thus, the move up. This morning gold is up $11 at $2065 – this after rising $9 yesterday. It pierced up and thru resistance at $2052 and is now back in the $2050/$2100 range. If the market continues to believe that a June cut is possible then watch gold test $2,100….
Eco data today: Well, it’s gonna be a fight…. S&P Manufacturing PMI – is expected to be 51.5 – Expansionary territory – and just another reason to sit tight on rates while ISM Manufacturing PMI is expected to be 49.5 – Contractionary territory (remember 50 is the neutral line) and so – which data point will they focus on? The strong one or weak one? Construction spending of +0.2% and U of Mich sentiment survey of 79.6. 1 yr. inflation expectations of 3% remain the call.
Dow futures are down 40, the S&P’s down 4, the Nasdaq is up 6 and the Russell is down 3. It is a new month and the 3rd month of the 1st qtr.…. Only 30 days until the marking period…. What will March bring…. will it come in like ‘lion and go out like a lamb’? Will we see pressure on stocks in the 1st half of the month only to see it subside as we move into the end of the month? No matter what – that is exactly why it is important to keep your head on straight, build a diversified, defensive portfolio and stick to the plan.
European stocks are all higher on this first day of the new month…. Italy is the best performer and is up 1.1% followed by Spain up 1%. Germany and the UK are up 0.7% & France is flat on the day. Eurozone inflation fell to +2.6% down from +2.8%. The ECB is watching closely – why? Because they are expected to cut rates in June to counter the stagnation across the region.
The S&P rose 27 pts or 0.5% to end the day at 5,096…. another new closing record and the 14th one this year….and it’s only been two months! While we are kissing the all-time highs – it’s tired….and appears to be struggling. NYCB which was down 53% until this morning will see another 25% come out when trading starts. It closed at $4.79 and this morning it is trading at $3.50 after it ‘identified some material weaknesses in their internal controls related to internal loan reviews.’ sound fishy to me…. but does this suggest a pothole ahead for the broader market? I don’t think so but remember – all we need is one catalyst to ignite the fire…. I just don’t think this is it…. NYCB has been under fire – it had already lost 55% coming into this morning while the broader market continued to make new highs…
Just fyi – Blackrock is the biggest holder with some 83 mil shares, Vanguard next with 70 mil shares, Wellington, State St, Dimensional Funds and Hartford Financials services round out the top 5 holders. How are they doing?
WEN – apparently gave their Surge Pricing idea some more thought (after getting completely trashed in social media) and is now using that debacle to launch a new ad campaign – saying that the ‘only thing surging at Wendy’s are the flames’. Burger King using this opportunity with a ‘no urge to surge’ promotion is offering FREE whoppers to gain market share saying that ‘We don’t believe in charging people more when they are hungry!’ Tou che!
Does the name Alissa Hienerscheid mean anything? (Think Bud Light). Where did she go? Is she teaching marketing at Harvard now? Just fyi – her ad campaign cost BUD some $1.4 billion…I wonder if she got a BIG bonus for that?
I am in NYC next week – so I’ll see you from there.
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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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.
Dover Sole Francese (Friday in Lent)
For this you need: 1 lb. Dover sole, flour, eggs, parmegiana cheese, pepper, olive oil, butter, fresh lemon juice, marsala wine, garlic, and some cornstarch.
Preheat oven to 300 degrees.
In a bowl – mix 3 eggs and a handful of parmegiana cheese and some pepper – beat well – set aside.
In a large sauté pan – heat up the butter and oil….
Now – dredge the sole in flour and then dip in the egg mixture.
Place in the hot sauté pan – do not crowd….
Cook the sole until nicely golden browned (maybe 2 mins max?) – now flip over and repeat – remove from pan – and place on an over proof dish and put in the over to keep warm until you finish all the pieces of sole.
Now – in the same sauté pan – add in some chopped garlic, fresh lemon juice (squeezed) and maybe 1/2 c of the marsala wine and 1 tbsp of corn starch (to thicken). Stir until you have a nice thick sauce.
Serve immediately on a bed of herb flavored rice pilaf and pour the ‘sauce’ over the fish.
Buon Appetito.
