Things you need to know.
- Weak bond auction ignites concern.
- Yields rise across the curve.
- Stocks suffer as some hit the SELL button.
- Gold Up, Oil Down
- House Passes the bill – markets stable.
- Try Poulet a la Moutarde.
Somebody sounded the alarm on Wall Street – that could be heard all the way from Wall St to East Capitol St, SE in DC (That’s the Capitol Building) ….. The VIX (Fear index) surged by 15.4% taking that index up and thru long-term resistance to end the day at 20.87 – just a hair below intermediate term resistance at 21.66…..This morning the VIX is churning…. falling 1.8% to 20.48.
Asian markets ended lower and European markets have begun the day lower. US futures? They are teasing just a bit higher – bouncing around the unchanged line. All of this a direct result of the One Big Beautiful Bill that, well, may not be as beautiful as it appears…and the bond market is the one sounding the alarm….. The White House intensifying the pressure on Republicans to pass Trump’s tax bill, warning that ‘failure would be a significant betrayal’, as House Speaker Mikey Johnson sweetened the deal – raising the SALT tax deduction limit to $40,000 (up from $10,000) to gain support.
Former Treasury Secretary Stevie Mnuchin chimed in – urging congress to find more cuts – saying that ‘the budget deficit is a greater concern than any trade imbalance’.
And so, it was –
Recall that 20 yr bond auction we discussed yesterday. If you don’t here is what I said
“Now today also brings a 20 yr $16 billion bond auction and the outlook is ‘cautious’ – last night the 20-yr yield closed at 4.99% and this morning it appears to yield 5.04% – which means that yields must rise (prices must fall) to create the demand….”
And guess what? That 20-yr bond auction with a 5% coupon was not so well received…..demand was ‘soft’ forcing the yield to go to 5.047%. (This was the highest yield since this bond was reintroduced into the marketplace in 2020) And that triggered a sell off across the whole curve and that caused yields to surge…the 2 yr ended the day yielding 4.01% up 4 bps, the 10 yr (which is the most important one for pricing purposes) rose 10 bps to end the day yielding 4.4885%, the 30 yr up 11 bps taking that to 5.0817%. By the end of the day – the TLT lost 1.7% while the TLH gave up 1.4%.
So, so much for declining mortgage rates!
As of last week – 30 yr mortgages were 6.81% – after today’s action – you can expect that to kiss 7% today! – which should mean that anyone looking to sell their house – may want to rethink their price expectations……rising rates will raise the cost of housing unless the price of the house declines….something it has to do – after the bubble the FED and the Treasury created over the past 16 years…in fact – Zillow reported on May 20th, that monthly home values have dropped in 27 of the 50 states – the avg drop is ~6%…..that’s 54% of the United States seeing lower home prices/values – causing many people to say – ‘Toto, I have a feeling that we’re not in Kansas anymore!’
So, if you are looking to buy a house…..sit tight…… – keep your deposit money liquid – put it in a gov’t mm fund – earn 4.5% – risk free and wait, because I think Zillow is correct.
So, think about this: if you were looking at a $1 mil home with a $700k mortgage at 6.8% – you’d pay $4,536/mo., and if the price of that home dropped by 10% say to $900,000 and you have a $600,000 mortgage at 7.15% – you’d pay $4,052/mo. That’s a 10% savings in your payment, even with a 4.5% increase in the rate. It’s a Win Win!
So, while bonds came under pressure so did stocks…. the concerns about the U.S.’s growing deficit, the Moody’s rating downgrade, the warning by Jamie Dimon about what he sees down the road caused ‘some’ investors and algo’s to do what? Run for the door! Hit the SELL button, of course there are others that were not fazed and stepped in to buy stocks at lower prices.
And so, by the end of the day – we saw the Dow lose 820 pts or 1.9%, the S&P lost 95 pts or 1.6%, The Nasdaq down 270 pts or 1.4%, the Russell gave back 60 pts or 2.8%, the Transports lost 403 pts or 2.7%, the Equal Weight S&P was the winner – only losing 23 pts or 0.3% while the Mag 7 gave up 266 pts or 1%.
Of the 11 S&P sectors – Real Estate took it on the chin – falling 2.6%, followed by healthcare – 2.3%, Financials and Consumer Discretionary – 2%, Utilities and
Tech down 1.8%, Industrials down 1.7%, Basic Materials – 1.3%, Consumer Staples – 1.2%, while Communications lost 0.8%.
Further down the chain – Homebuilders -3.1%, Airlines – 3%, Retailers -3%, Disruptive Tech – 3.1%, Metal & Miners – 1.4%, Semi’s – 1.8%, Aerospace & Defense – 2%, Big Pharma – 1%, Exploration & Production – 2.2%.
Now while stocks were down – the contra trades had a winning day – the VIXY surged by 6.9%, the DOG + 2%, SH + 1.7%, PSQ + 1.4% while the SPXS (Triple Levered S&P) +5%.
Look – The broader market outlook is just a bit uncertain right now and you know that the one thing the market hates is ‘uncertainty’. U.S. equities are struggling, worried about rising yields that are being driven by deficit concerns rather than growth optimism, creating challenges for stocks. And with foreign investors apparently less willing to finance U.S. deficits at current levels – many are now expecting yields to push even higher. Not something anyone wants to see.
Eco data today includes the Chicago Fed National Activity Index, Initial and Cont. Claims, S&P Manufacturing and Services PMI’s and Existing Home Sales.
And with all this nervousness – gold did exactly what you would expect – it rose by $33 or 1% – to end the day at $3,345/oz. The jump – in my opinion – is all about the uncertainty – economic and geo-political. And as long as the uncertainty remains – investor will seek the ‘safety trade’. Now I understand that the House is voting right now (6:30 am) – and we are told that we should have an answer before 7 am….If the bill passes – then that relieves some of the uncertainty and so we could see gold retreat a bit, not much, just a bit. We remain in the $3,230/$3500 trading range.
Yesterday – oil was in retreat…. falling 1.1% to end the day at $61.34 and this morning oil is under pressure again…falling $1.10 or 1.8% to $60.55 after the Saudi’s ‘discuss another super-sized production increase’ at next week’s meeting. Headlines suggest that a 400k barrel/day hike in July – TRIPLE the amount initially planned is just one of the options on the table. The reason for the increase? To punish cartel members that are over-producing – think Kazakhstan and Iraq while others will tell you that they are trying to ‘please’ Trump. A look at the chart now – suggests a trading range of $55/$63. And again – this is not a demand issue at all, this is all about an abundance of supply. Econ 101.
As noted – US Futures are churning….as we await the vote tally – and it passes 215 vote Yay, 214 vote Nay. Mikey got it done before Memorial Day – check the box! Now it’s off to the Senate…….. Dow futures are down 25, S&P’s up 8, Nasdaq up 45 while the Russell is down 4. Remember – the market has been betting that this would happen – the vote only solidifies that expectation….so we can take one of the uncertainties off the table.
The S&P closed at 5844 last night…. trendline support is down at 5770 or 1.2% lower from here….. a level I think needs to be tested…. but remember – we did create a gap in the chart at 5690 – so if we fail to hold at 5770 – then I suspect we will trade down to fill that gap.
European markets are all lower…. down about 1% across the board.
Stick to your plan and remain resilient, if the action makes you nervous then call me for a free (no obligation) portfolio analysis. 561-931-0190
Take good care,
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Here is a classic French Bistro dish – It’s bone in thighs cooked in a mustard cream sauce.
It has a fancy French name – Poulet a la Moutarde – that sounds delish – the English version.
Chicken with Mustard!
Makes an easy weekday meal –
You need – the bone in thighs, skin on, Olive oil, shallots, garlic, s&p, white wine, chicken stock, heavy cream, chopped parsley, Dijon mustard and a good high quality grain mustard.
Begin by seasoning the thighs with s&p.
In a large skillet – heat up some olive oil – when hot – add the thighs and brown on both sides. Remove and set aside.
Now add the sliced shallots and chopped garlic. Sauté for 4 mins.
Next, deglaze the pan with white wine, then add the chicken stock. A tablespoon of the Dijon mustard, season with s&p.
Now add in 1 c of heavy cream – mix well. Now add back the chicken, coat the chicken in the sauce, cover and simmer on low for 20 mins.
When ready – remove the chicken, stir in a teaspoon of the grain mustard and add the chopped parsley. Mix.
Serve the chicken on a bed of mashed potatoes topped with mustard cream sauce.
Buon Appetito
