Things you need to know
- NFP comes in strong but WAGES were the KEY.
- Is it Wage/Push or Cost/Pull inflation?
- Iran says NO DEAL – and rebuffs any negotiation.
- Anything TECH continues to outperform.
- CPI/PPI due out this week, Kevy takes the FED.
- Try the Tortiglione con Salsiccia & Gorgonzola
We are now entering the middle of May and the 11th week of the Iranian conflict……Stocks are at all-time highs – think S&P, Nasdaq and Russell, – the Dow and the Equal Weight S&P are not far behind….Bond yields remain on the edge, Oil is up $2 at $97.50, Gold is down $50 at $4,665, the VIX is up $1 at $18.15 while the dollar index remains below all 3 trendlines at 98.
Now, let’s talk what happened on Friday because it was busy….
At 8:30 am we got the April jobs report. Nonfarm Payrolls came in at +115k vs. expectations for +62k. That’s a blowout number. Nearly double estimates. And according to the old playbook? Stocks should’ve sold off hard. Why? Because a stronger labor market is supposed to mean a stronger economy. Stronger economy means tighter labor conditions. Tighter labor conditions mean higher wages. Higher wages mean inflation pressure. Inflation pressure means the Fed stays tighter for longer. Yields rise. Stocks wobble.
Simple, right? Except that’s NOT what happened. Why? Because the market completely ignored the headline number and focused instead on wages. Average Hourly Earnings rose just +0.2% m/m vs. +0.3% expected and 3.6% y/y vs. the expected 3.8% – and THAT changed the entire tone of the day. The market looked at that and said: “Ok…jobs are solid, but wage pressure is NOT spiraling.” And that matters because this is where people confuse two very different types of inflation. Wage/Push vs. Demand/Pull.
Wage-push inflation comes from the COST side of the equation. Workers demand more money because labor is tight, unions have leverage, cost of living rises — employers pay up, their costs go higher, and then they pass those costs along through higher prices. That’s how you get the ugly stuff… the wage-price spiral. Wages rise. Prices rise. Workers demand even more wages to keep up. Businesses raise prices again. Around and around, it goes. And once THAT cycle gets embedded? It’s very hard to stop. Think late 70’s/early 80’s.
That’s what the Fed was terrified about in 2022 and 2023. And it’s exactly the kind of inflation Paul Volcker had to crush in the early 1980’s (we discussed this last week) when he took Fed Funds rates to 21% to break the back of inflation.
On the other side we have demand-pull inflation. That’s when consumers have too much money chasing too few goods. Economy is running hot. Demand explodes. Supply can’t keep up. Sellers realize they can charge more because people are willing to pay for it. Think post-COVID. Stimulus checks everywhere. Pent-up demand unleashed. Supply chains tied in knots. Everybody buying cars, appliances, vacations and electronics all at once. That wasn’t wages driving inflation. That was DEMAND pulling prices higher.
Now here’s why all of this matters. Demand-pull inflation is easier for the Fed to fight. Raise rates, slow demand, cool the economy. Painful? Sure. But there’s a policy lever there.
Wage-push inflation is trickier because if wages are driving higher while the economy itself isn’t overheating, then the Fed risks crushing growth just to stop a cost problem. That’s the stagflation trap Slow growth. Sticky inflation. Worst possible combination.
So now, let’s come back to Friday. The headline jobs number screamed “tight labor market.” And under normal circumstances, tight labor market should mean accelerating wage pressure. Bond yields should have exploded higher; Stocks should have sold off. But that is NOT what happened.
Wages came in softer than expected. Meaning the wage-push mechanism ISN’T firing. And that told investors something very important – This labor market may still be resilient without becoming inflationary. And that’s why bonds rallied – the TLT and TLH both up by 0.5% and 0.4% respectively causing the 2, 10 and 30 yr yields to drop 3 bps and that’s why stocks ended the day higher..
The Dow up 12 pts, the S&P up 62 pts, the Nasdaq up 440 pts, the Russell up 22 pts, the Transports added 17 pts, the Equal Weight S&P rose 25 pts while the Mag 7 added 335 pts.
Of the 11 sectors – the tech trade and more specifically ‘Chips’ trade continues to amaze and attract investors dollars – the XLK – tech etf rose 3.45%, the Semi’s – SOXX rose 5.7%. Anything remotely resembling a ‘chip’ rose even more… Think – AMD + 11%, INTC + 14%, AVGO +4.3%, QCOM +8.2%, ASML + 5%, AMAT + 6%. Cybersecurity names were up 2.6%, Disruptive Tech up 1.5% while Quantum names gained 2.7% while the Growth Trade – SPYG gained 1.25%.
Behind that we had Basic Materials up 0.3%, Consumer Discretionary + 0.3%, Consumer Staples +0.25%. Real Estate was flat, while Utilities and Healthcare lost 0.9%, Industrials – 0.5%, Financials – 0.6%, Energy and Communications lost 0.4%.
Down the chain – we saw strength in Retail up 0.4%, Value up 0.3%, Metals & Miners up 0.4%, Aerospace & Defense up 1%, Biotech u 0.8% while the Small Cap 600 Growth trade gained 0.5%, Emerging Markets +2%.
The contra trades continue to lose – the DOG is 2.7% ytd, the SH down 6.7% while the PSQ is down 13% ytd.
Now, oil remains at the center of all of this – but is almost beginning to feel like investors are pushing it to the back burner. They are decoupling the geo-politics from the US economy (for now) – something I think is a mistake. Oil is a cost-push inflation problem. Same basic dynamic as wage-push inflation — except instead of labor costs driving inflation, its energy costs flowing through every part of the supply chain. Transportation. Manufacturing. Chemicals. Food. Fertilizer. Shipping. Airlines. Plastics. Everything.
Over the weekend we learned that Iran formally responded to the U.S. proposal on Saturday and apparently the response was NOT what Washington wanted to hear.
Trump read the response Sunday and immediately lit up Truth Social calling it “TOTALLY UNACCEPTABLE” while accusing Iran of “playing games” with the US and the world. Iran fired right back. Making it crystal clear that Iran has NO intention of surrendering its nuclear ambitions or bowing to outside pressure.
In other words? The optimism that fueled this market all week just slammed into reality. And here’s the real issue…The two sides are still miles apart on the things that actually matter. The U.S. wants Iran to halt uranium enrichment for more than a decade and physically remove its highly enriched uranium stockpile from the country. Iran says enrichment is their red line and non-negotiable. They want war reparations, and complete sovereignty over the strait and they want Israel to go away Those are not small disagreements.
And then Netanyahu goes on 60 Minutes over the weekend and says the war is “not over” and there’s still “more work to be done.”
Translation? Don’t assume this thing is calming down anytime soon. Add in reports of newly surfaced satellite images showing another alleged Iranian nuclear-related site and suddenly the whole “deal is imminent” narrative starts looking a whole lot shakier.
This morning – oil is up $2 at $97.40; bond yields are higher…taking back the 3 bps they lost on Friday, European markets are mostly lower, The VIX is up 6% and US futures are under a bit of pressure.
The earnings parade continues, but we are getting to the end…NVDA is on the 20th….
Eco data includes Existing Home Sales -today expected to be up 2%, Tomorrow is the April CPI report, and this is important…..top line m/m expected to be up 0.6% while Core is expected to be up 0.3%. Top line y/y up 3.7% and Core up 2.7%. All figures up over last month and the worry is that they will be worse than expected while the surprise will be if they are better than expected. And then Wednesday we’ll get the April PPI report and that is expected to be up substantially over last month. And so, the inflation narrative continues……
Kevy Warsh is expected to take the reigns from JJ on Friday – the 15th…. but I do not expect the market to react – it’s had plenty of time to voice its concern.
In the end – the CPI Tuesday morning & PPI Wednesday morning are the pins that could pop the balloon — and with the Iran deal falling apart over the weekend, oil is going to be working against that inflation print before we even get to 8:30 am tomorrow morning.
Bitcoin is trading at $81k, Ethereum is at $2350 while Solana is trading at $95.20.
US futures are down…. Dow -10, S&P’s -8, Nasdaq -20 and the Russell is down 2.
Call me at 561-931-0190 and let’s talk about how SlateStone Wealth can help you navigate all of this and reach your goals.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Tortiglioni con Salsicca & Gorgonzola (sweet sausage and Gorgonzola)
This is so simple and so good.
For this you need – the pasta – Tortiglioni is like a bigger, longer Rigatoni – sweet sausage, olive oil, onions, soft gorgonzola, heavy cream (you can use lite), s&p and of course some pasta water.
Bing a pot of salted water to a rolling boil.
Begin by heating up some olive oil in a large sauté pan. Add in the diced onion and sauté for 5 mins.
Now add the sausage meat that you have taken out of the casing. Crumble and add to sauté pan.
Cook until all browned. Season with s&p.
Next – remove the sausage and set aside.
Add the pasta to the boiling water and cook for 8 mins or until aldente.
Add the soft gorgonzola to the sauté pan – like 2 large tablespoons – but more if you are making a lot. Allow the cheese to melt – now add in 1 c of heavy cream – and add back the sausage. Mix to coat.
When the pasta is done – using a slotted spoon – add the pasta to the sauté pan and mix well. If you need to – add in a ladle of the pasta water to keep moist.
Serve immediately.
Buon Appetito