Things you need to know 

• Stocks are NOT struggling
• CPI is only moments away…. the world awaits
• FED Officials trying to tamp down the angst – promising not to do anything to upset the markets
• Will the 10 yr. pierce 2% today?
• Try the Cavatappi

Stocks struggled to maintain gains…. oh wait – struggled?  Not so much…. stocks continued to surge going into today’s all important Consumer Price Index Report (CPI) – the Dow gained 305 pts or 0.9%, S&P’s up 66 pts or 1.4%, Nasdaq up 295 pts or 2.1%, the Russell added 38 pts or 1.9% while the Transports added 300 pts or 1.93%.  10 yr. treasury prices rose, sending yields lower – ending the day yielding 1.93%, Oil rallied back to close north of $90/barrel, gold also continued to advance rising $6 or 0.3% to end the day at $1,834/oz.

All this as different FED Presidents attempted to calm the nerves of invetsors….in the morning we heard from Atlanta’s Raffi Bostic, who told us that the market had gotten a bit ahead of itself in defining the number of and increment of coming rate hikes……Talk of 5, 6 or 7 hikes was a bit like lighting your hair on fire and moves of greater than 25 bps was most likely not in the cards…..now while he said this- he also said though that there ‘isn’t anything that is NOT on the table’ – which is kind of contradictory, No?  But no one paid attention…….  And then later on Cleveland’s Loretta Mester reiterated those views as she also tried to pull back on the ‘mania’ that has been created by the big investment banks – saying that she does ‘not see a compelling case for a 50 bps rise’  And investors, traders and algo’s (mostly the algo’s) loved it…..suddenly, it’s all about 3 maybe 4 hikes and that takes about 60% of the fear off the table….and stocks surged…. 

And now it’s here….the CPI report is due out at 8:30 am….we have been talking about this for weeks now……the expectation for a strong number is out there….in fact – the report is expected to show an increase in y/y prices of 7.3%….the last time we saw that was when – Ronald Reagan was President….and just to be clear that was in 1980….after Jimmy Carter planted the seeds that led to out of control inflation, never mind the complete loss of national pride (think Iranian Hostage Crisis) – but that is another story.

Now, we saw markets come under pressure in January in anticipation of what this along with a host of other macro data reports was about to reveal…. The Russell falling into BEAR mkt territory, the Nasdaq kissing BEAR mkt territory while the Industrials and the S&P managed to take a beating but remained within correction territory.  The big investment banks fueling the fire, dictating what the FED needed to do in order to reign it in….10 yr. yields rising from 1.5% to 1.96% in a matter of weeks….and the year-end target of 2.5% was now 3+% …….Growth stocks got hammered, value stocks became the new favorites, Energy exploding higher +24% ytd followed by financials +5% ytd.  Communications, Tech and Consumer Discretionary all leading the way lower down 7%, 5%, & 7% respectively.  

So –

If the number is what we expect, then I think we could see the market consolidate a bit right here…..as it digests the recent surge…if the number is stronger than the expectation, then I expect stocks to back off, because the conversation will turn once again to why the FED needs to be more aggressive, I would expect 10 yields to kiss and pierce 2% – setting the stage for 2+% yields going forward….Say goodbye to a 10 yr. with a 1 handle on it. Growth stocks will come under fire again, while value names will retreat but not fall out of bed.  Big Americana multinationals that have solid divy’s and pricing power will benefit.

Pepsi being one of those companies…they just reported and beat on all the lines, they raised their dividend by 7% (going from $4.30/sh to $4.60/sh)  and announced a $10 bill stock buyback, offered up strong forward guidance and they are RAISING prices – recall they also raised prices in 2021…..the stock is quoted up $2 or 1%.

Disney being another one (although they are not currently paying a divvy – they are a big Americana multi-national) …they reported ‘blockbuster’ numbers, big subscriber growth, doubling revenues from their theme parks (raised prices for everything DISNEY), blah, blah, blah…that stock is quoted up $10/sh or 6%.

Now – if the CPI report is weaker than the expectation – which I am not sure how that could be – but if it is, then I suspect that the algo’s will continue to push higher as the conversation will be about how the FED has this and that all of the recent angst is nothing but noise.  Growth stocks will surge….and value stocks will retreat….

The other data point to look at today is Real Avg Hourly Earnings y/y and Real Avg Weekly Earnings y/y are. Now last month – these reports showed a slight decline – what will they show today.  In any event – all you need to do is go to the store and try to go shopping.

Now on a side note – did you see the clip about the BoE official pleading with Britons to NOT ask for a raise when negotiating a pay package – no matter that inflation across the country is spinning out control…because rising wages will only cause prices to rise even more as companies try to pass along rising costs….

‘The governor said businesses should assert “restraint” while negotiating pay packages with their workers to try and help keep inflation, already at its strongest level in 30 years, in check. When asked whether the BoE was asking workers not to demand big pay rises’, Bailey said:

“Broadly, yes.  In the sense of saying, we do need to see a moderation of wage rises. Now that’s painful. I don’t want to in any sense sugar that, it is painful. But we need to see that in order to get through this problem more quickly,”

Yeah, how’s that working?  Can’t wait for Jay or Joey to ask that of hard-working Americans.  And that is how the Wage/Price Spiral works…. Again – go back to the Jimmy Carter years….

This morning stocks are churning in place…. Dow futures are up 64 pts, S&P’s down 5, Nasdaq is down 40 pts, and the Russell is down 5…. the 10 yr. treasury is yielding 1.94% and oil is UP $1 or 1% at $90.80. Don’t kid yourself – today is all about inflation.  Period.  And today’s report will set us up for next Tuesday’s PPI (producer price index) report.

European markets are also digesting…all market centers up between 0.1% -0.5%.

Bitcoin is trading at $45k and Ethereum is trading at $3,200 – both up slightly over yesterday but down from overnight….in any event it is what it is at the time you choose to mark it.

The S&P closed at 4587 – up a whopping 65 pts…. the index blasting thru intermediate term resistance readying to kiss its short-term resistance at 4611.  Now right now, it does not appear to be in the cards today…but if the CPI surprises to the downside, then it is possible and if we do or rather when we do, I will then expect the markets to surge to the early January highs of 4820 ish.   If the report causes some angst, then I would expect to see the S&P back off and test the longer term trendline at 4450…. So – sit back, grab the popcorn – patience is a virtue….

Remember – stick to the plan.  Call me to discuss.
Take Good Care

Chief Market Strategist, Consultant
kpolcari@slatestone.com

Cavatappi w/Arugula and Cannelloni Beans

Cavatappi is a kind of macaroni that looks like a spiral tube.  The word Cavatappi is a combination of Cava & Tappi – whose literal translation means “tap extractor” or corkscrew.  Capisce?

This is a vegetarian dish that is easy and quick to make.

Bring a large pot of salted water to a boil. Add the Cavatappi and cook until aldente – 8 / 10 mins.

In a sauté pan – heat up some olive oil, crushed garlic and a sliced/chopped “red” onion.  Sauté until the onion is soft and translucent.  Now add a can of cannelloni beans – juice and all and stir to heat up…about 4 mins or so.

Now add the arugula and stir.  Arugula will wilt – no worries.  Drain the pasta – saving a mugful of the pasta water…. return pasta to pot and add back 1/4 cup of the water to re-moisten.  Next add beans and arugula – handful of Parmegiana cheese and toss.  Serve immediately in warmed bowls with freshly toasted garlic bread.

Buon Appetito.