Things you need to know.
– It’s FED week…. (yawn).
– Former FED members say, ‘Slow Down’.
– Apollo warns of a 1970’s repeat (Where have they been?)
– Gold down on rising Bond yields
– Try the Pasta Genovese
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Tech continues to hold onto the gains as the broader market wonders what’s next……. Bonds fell, oil rose, gold fell, while the VIX lost ground as well. The Dow lost 86 pts, the S&P lost 1, the Nasdaq gained 24 pts, the Russell lost 15, the Transports gave up 131 while the Equal Weighted S&P gave back 28 pts.
It is FED week – you know the one where we await the latest monetary policy announcement on what they will do with rates…Currentlly – the bet is 100% that JJ will announce a rate cut on Wednesday – telling us that while the labor market remains robust and inflation remains stubborn (and in fact has begun to turn up again) the FOMC committee finds it necessary to cut rates again to get us closer to what would be considered ‘neutral’. Now you know me – I am in the camp that says the FED should do nothing…. there is no need to cut, BECAUSE the labor market remains robust, and INFLATION is turning up….so why are we cutting?
Nicky T of the WSJ – runs with a headline piece in today’s edition….
“Inflation Unease Muddies Fed Path on a Cut” – Powell faces misgivings from some officials on pace of rate easing.
In this story, Nicky reminds us that JJ didn’t want to send ‘signals of distress’ when they slashed rates by 50 bps in September – but now after an additional 25 bps cut in November – the FED is left to decide if the expected 25 bps cut this week is appropriate…Over the past couple of weeks – the message has been mixed at best….some members suggesting that to ‘do nothing’ would be appropriate – arguing that the FED is losing credibility by cutting because inflation remains above their 2% target, and is starting to tick back up, while others continue to push for another cut telling us that the uptick in inflation is a ‘non-event’ – does the word ‘transitory’ bring back fond memories?
At this point – it is what it is and whatever they decide for this week is less important than the message that they deliver for the coming year……and I say that because the market is pricing in a rate cut, it is expected, so to do nothing would be the surprise…something that JJ has no interest in at this point in the year….with only 2 weeks left until the calendar turns to 2025 –the chaos that the algo’s would create if they don’t get the cut they are expecting is not what he prefers. This is the very definition of ‘the inmates running the asylum’.
In any event – I am going on record that this is a mistake – look – we are entering a new year, with a new administration that has promised a lot – street analysts are and have been projecting inflation to tick higher….so again, what doesn’t the FED see? Last week – we had 2 former FED Presidents weigh in on this argument (recall, the FOMC members are in lock down mode, they can’t speak out loud, but non-members and former members are not precluded from doing so….)…Dallas’s Richy Fischer and Boston’s Eric Rosengren – both would opt for NO cut and current Dallas President – Lorie Logan (not a voting member this year) warned us last week that cutting to far or even right now would be a mistake – she is under the opinion that that ‘normal’ (neutral) rate is NOT much lower than where we are….so we can afford to wait….
On the other side we have San Fran’s Mary Daly (SVB bank failure fame) and Chicago’s Austan Goolsbee who are giddy about cutting rates – suggesting that they don’t think there is a risk yet of cutting too far considering how high we took them….which is laughable…5.25% rates are not historically high at all, but compared to zero rates for 16 yrs, then I guess 5.25% looks usurious….it’s ridiculous….
I have been concerned for months now that we are about to see history repeat itself (think 1979/80) …and over the weekend – the Kobessi Letter joined in……saying that Apollo Global Management ($740 bil of AUM) came out with a HUGE call – officially declaring that inflation is back! (I’d say – where have you been?). They are now warning of that 1970’s style rebound in inflation into 2025/2026. HELLO!!! They point out that the Atlanta FED Core Sticky CPI has leveled off at 4% and all major measures of overall CPI stickiness is now solidly above 3%, the latest core CPI coming in at +3.3% (recall – the FED’s target is 2%). 3 month annualized CPI is now above 4%…. So, we wait….
Key eco events this week include today’s S&P Manufacturing PMI of 49.7 & Services PMI of 55.8, Tuesday’s Retail Sales, Wednesday’s FOMC rate decision, Thursday’s GDP data and Existing Home Sales with Friday’s PCE inflation data (the FED’s favored gauge) that is expected to tick up – top line y/y at +2.5% up from +2.3% and Core PCE y/y of +2.9% vs. +2.8%.
The VIX fell further into complacency territory – ending the day down 0.15 at $13.77 – remaining in the ‘no worry zone’ – which is exactly why we should be worried…. but you can’t fight the tape, but that also doesn’t mean you chase the tape… This is the time to be really smart, do your diligence, do not get drawn into the FOMO (Fear of missing out) mentality. This morning – the VIX is ticking up 55 cts at $14.36 – still well below all 3 trendlines…. but we know, that if we get hit with an unexpected headline…we could see that change in a heartbeat…and if it does, stocks will decline.
Bonds sold off again…the TLT down 1% while the TLH lost 0.8% and the AGG gave up 0.4%. The 2 yr now yielding 4.22% up from 4.17% while the 10-yr kissed then blasted thru 4.3% to yield 4.37% this morning – recall, I think we see 4.5% before we see 4% – and in fact I am beginning to see 4.75% before we see 4%.
Oil rose by 1.6% or $1.10 on Friday to end the day at $71.10 – piercing both the short and intermediate term trendlines that are converging right here at $70.33 and now leaving us about to challenge the long term trendline at $73.30. This morning – oil is off 86 cts at $70.43 on a negative China story – think lower demand – it’s exhausting…. but remains above the trendline at $70. 33.. the question is – does it hold or not? A failure would see oil retest the December lows of $67.50 while a hold at these levels would set us up to test resistance at $73.29.
Gold got crushed on Friday – falling $44 or 1.6% to end the day at $2665…. on some profit taking due to those rising bond yields…. remember – gold is a ‘safe haven’ non-yielding asset which works when bond yields fall, but when bond yields rise, we typically see gold come under pressure as investors shift to ‘higher yielding safe haven’ assets – think US debt. Friday’s action took gold below the short-term trendline at $2702 leaving us in the $2640/$2702 trading range. The next move will be based on what we hear on Wednesday.
US futures are ticking a bit higher….as we speculate on what JJ will say at the presser……Will he take one for the team and cut now only to say – don’t push it in 2025…? Or will he continue to suggest rates are going lower? Recall – ever since he started cutting FED funds rates – 10 yr treasury yields have done nothing but rise…….so you have to ask – Is the bond market suggesting that the Fed is wrong? You know where I stand, the question is where you stand.
European markets are all lower…The Bank of England meets on Thursday this week and the sense is that there will not be a rate cut. In Germany – investors are keeping an eye on today’s vote of ‘no confidence’ for Chancellor Olaf Scholz to set the way for snap polls to take place in Feb….If that happens, that’s the second vote of ‘No Confidence’ in as many months in a major European country….
The S&P ended the day flat at 6051. We remain in the 6000/6100 trading range in my mind thru year end…unless the market perceives JJ comments as too hawkish – then we could see a swift test of trendline support at 5910 ish. I think the risk is more hawkish than dovish but that’s me.
Again, at this point, I would let the portfolio ride only by making last-minute changes due to tax planning issues. New money should be sitting in a gov’t mm fund earning 4.25% while we wait for the new year – where I fully expect (or hope for) some early weakness to take the froth out. In the end – patience is a virtue.
Take good care.
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Pasta all Genovese
This is a great, simple dish….and so good.
You need: 1 ½ lbs. of boneless beef chuck – cut into pieces. s&p, olive oil, diced celery, and carrots, 3 large Red Onions, chopped, 1 tblsp tomato paste, 1 c white wine, 1 bay leaf, 1 lb of Rigatoni pasta, and of course the fresh grated cheese – for this one though, it’s Pecorino Romano.
Start by seasoning the beef and then browning it in a deep pot. Once it’s all nice and crusty, remove and set aside. Now sauté the carrots and celery for 10 mins…. scraping the bottom of the pot. Season with s&p.
Next add the tomato paste and cup of wine – allow it to come to a boil and then reduce to low. Add back the beef. Now add the red onions – laying them right on top of the whole shebang. Add the bay leaf. Cover and let cook for 1 hr….. – the onions will melt. Be sure to take a look at it and stir so that you make sure nothing is burning. Now cook for another 30 mins or so…. The meat should be tender and soft and easily break apart with a wooden spoon and a fork. Adjust seasoning if necessary.
Discard the bay leaf.
Next bring a pot of salted water to a rolling boil and cook the rigatoni.
Now in a separate sauté pan – add 2 ladles of the sauce. Now add some of the pasta and ½ ladle of pasta water. Toss with grated cheese and serve. Repeat until you have prepared all of the pasta. MMMMM.
Buon Appetito
