Things you need to know
- Jay does not surprise the markets, but signals that he is open to being more aggressive
- Investors celebrate taking stocks higher….as if this was new news…
- Oil in retreat after its parabolic rise, but is once again kissing $100
- Break out the slow cooker – we’re having Corned Beef and Cabbage.
March 16th, 2002 – Reported by Bloomberg – Taken from the presser at 2:30 pm
“The FED chief reported scant evidence of a downturn anytime soon, saying the probability of a recession is the next year is “not particularly elevated” ……But if inflation doesn’t respond as expected – we reserve the right to become MORE aggressive.
That reminds me of – No need to worry – Inflation is TRANSITORY.
Investors and markets celebrated the fact that the FED finally made the first move – a move of many now expected in the months ahead…in fact by the sounds of it, we can expect 6 more 25 bps rate hikes…(for a total of 7 hikes or 1.75%) and that means that we can expect a hike at EVERY meeting between now and the end of the year…..May, June, July, September, November and December….(Note no meetings scheduled in April, August and October). Which only means that IF inflation does not respond to these very gentle hikes -there is a possibility of hiking in an OFF month -which would signal ‘desperation’. So here is what I thought they should do out of the gate…. Say what they mean and then do what they say.
He should have grabbed the bull by the (? – horns?) and raised rates 50 bps yesterday with a promise to raise them 50 more in May -that gets us up 1 full percent before the summer which then leaves them 6 months to see how the economy reacts allowing them then to hike 25 bps at subsequent meetings if they want to be gentle and that would take us to +2.25% vs. the 1.75% that he has basically promised. In either case – inflation is running at 8+% and that’s before the possibility of it running even higher if the smaller, gentler hikes prove to be useless. Now I’m not being a ‘Debbie Downer’ here, but the sense is we need to be more aggressive….and so many economists polled agree that we are in for a ‘hard landing’ – read: Recession. The idea that the FED can manage a soft landing is now out the window…..they might have – had they began their very gentle rate increases in the summer of 2021…..and by now – we would have already been at 1.25%….but no, it was political….they didn’t want to disrupt the roaring bull market in 2021…..so they sat back and ignored the warning signs so now we are where we are.
This new language anticipates ‘ongoing’ rate hikes throughout the year…. which means that they are not going to let the mid-term elections get in the way….in addition they think we will get another 1% increase in 2023 -which would take us to 2.75% at the end of 21 months. But the FED didn’t stop there – they also added that they expect to begin reducing their $9 trillion balance sheet at the next meeting – May 3 – 4th – at the FASTEST pace ever – it is expected that they will reduce at the rate of $75 – $100 billion/month…. Prior to this – the fastest pace that they ever reduced the balance sheet was about $50 billion/month and that was in 2018/2019. Remember when he promised that it would be a 3-part move…. stop the stimulus, then begin to hike and then attempt to reduce the balance sheet – yeah well, that went out the window – fast.
Expected REAL GDP growth was downgraded from 4% to 2.8 % while the PCE inflation rate went from 2.6% to 4.3%. The PCE is expected to come in at 6.1% on March 31st – and only expected to go higher in the months ahead – so 4.3%? Not so sure that is realistic.
Now – this does not mean that you need to light your hair on fire and sell everything – in fact – I would slow down and consider that currently the economy is strong, corporate profits are up and interest rates are still ‘historically low’ which makes stocks attractive. In any event though, this move is long overdue….in fact – if it were me – it would have started in the summer of 2021 – but alas I am not the FED Chair – and that’s good because they are way behind the eight ball and my sense is that they will need to move more aggressively than his comments revealed.
By the end of the day- the Dow added 520 pts or 1.5%, the S&P up 96 pts or 2.2%, the Nasdaq up 490 pts or 3.7%, the Russell up 62 pts or 3.1% and the Transports absolutely killed it – rising 855 pts or 5.5%… (you can thank falling oil prices – which we will get to in minute). The excitement in the markets – mostly caused by ‘smart logic algo’s’ that only scrape the headlines looking for positive words vs. negative words…and when the find them – it RISK ON…..which means – the buy side algo’s go into overdrive while the sell side algo’s cancel offerings in line – leaving a vacuum in prices – forcing the buyside algos to reach higher and higher…tripping over each other in an attempt to fill their orders…..It is the contra side of what we just experienced over the last two months on the downside….Remember – its not like there are more buyers than sellers – there are not…there are an equal number on both sides – its just that on days like yesterday – the buyers become so aggressive that the sellers take advantage of their angst – the same way the buyers took advantage of the sellers angst over the past 3 months.
The 10 yr. Treasury ended the day yielding 2.18%, the 30 yr. ended yielding 2.45%. Gold fell $20 to end the day at $1,909/oz, Oil fell $1.4 to end the day at $95.04/barrel. The Bloomberg commodity index – BCOM fell by 1% and so investors celebrated thinking inflation just might be waning…. Oh boy…really?
Well, the administration did host a meeting of 20 top Tik Toker’s – all of whom were between 15 – 22 yrs. old and all of whom have followers between 1 mil and 10 mil people…….…to sell the story to American’s that we can thank Vlad Putin for higher prices…. it’s his fault, no one here is at all responsible for the $80 tank of gas, or the $12 /lb. Rib-eye. Never mind what has happened to milk, eggs, bread, cereal, chicken, pork, pasta, olive oil, ketchup, peanut butter and jelly – are you getting the picture. The videos of these tik toker’s attempting to explain complex economic theories to their followers is laughable if not insulting. Apparently, the Biden’s think that that age group is going to usher in another wave of democrats in November 2022 and then again in November of 2024. Well, unless they change the voting age to 12 – that’s unlikely – but I digress.
While the talk lately has been about ‘recession’ – (note the plunge in stock prices over the past 3 months) you would not have noticed that yesterday….9 of the 11 broad S&P sectors ended in the green – Utilities and Energy were the two ‘dogs’ closing down 0.2% and 0.5% while Tech surged by 3.25%, Consumer Discretionary up 3.4%, Communications up 2.7%, – it is necessary to note that those 3 sectors have gotten beaten up the most having fallen better than 20% this year……after the last couple of UP days – each of those sectors have rallied nearly 6.5% as bargain hunters go on a shopping spree but still leaving them down about 14% ytd – remaining the 2022 underperformers.
The ‘short’ hedges are getting slammed on the two-day rally…the DOG etf has lost 3%, the SH etf lost 4.5% and the PSQ has lost 7%. The triple leveraged ETF SPXS – the S&P short has given back 10% while the SPXL (S&P long) has gained that same 10%.
Oil – which saw a spectacular parabolic rise between February 24th and March 7th – UP 44% – has now given most of that back…. falling 28% through yesterday. The rise due to the Russian invasion of Ukraine and then all of the hysteria created over loss of supply, and surging demand – and then the weakness being credited to the idea that Joey would be able to replace the lost oil by releasing millions of barrels out of the SPR (Strategic Petroleum Reserve) as well as begging Iran and Venezuela to ‘help a guy out’.
Yesterday’s weakness also being credited to an unexpected jump in US crude stockpiles as well as some scant signs of progress in peace talks. Yeah – right – maybe after he manages to completely destroy a country and takes control…If anyone thinks that Vlad is NOW going to come to the table – they are mistaken…. especially since Joey promised to supply Ukraine with more military supplies, stopping short of ‘closing the skies’ as Zelensky begged for in an open appeal to congress yesterday morning. This morning the Kremlin re-iterated their intent and made clear that they don’t respect the US or the allies and will not stop until Ukraine surrenders.
This morning – oil is trading up $4 or 4.5% kissing $100 barrel after the IEA (Int’l Energy Agency) told us that we will lose 3 million bpd of Russian crude per the sanctions. Iran and Venezuela haven’t confirmed yet if they will help Joey out….and Joey and his left leaning party will not make drilling in the US any easier allowing us to be energy ‘independent’ the way we were. But let’s not go there right now.
US futures are marching in place this morning – one day after the FED changed the course of monetary policy as investors digest all of the economic news…My friend Stephanie Link telling us that ‘we all know that the Fed is behind the curve – but at least they are telling the market that they are trying to fix it’ – and while that is true – it is infuriating for Americans that knew this, that saw this months ago…. Leaving so many to ask – What were they doing? At 6 am – Dow futures are down 40, S&P’s down 9, the Nasdaq down 27 and the Russell down 4.
Eco data yesterday revealed that consumer confidence is falling…. Retail sales EX autos and gas falling 0.4% vs. the expected rise of 0.4%. Today we will get Housing Starts – exp to be +2.8% while Building Permits are expected to be down 2.4%. Industrial Production of +0.5% while Capacity Utilization will come in at 77.9% – inching closer to the tipping point of 80%.
European markets are lower this morning but not much…….as investors their digest Jay’s comments. The war in Ukraine continues to dominate the news and the comments this morning is not helping. At 6 am we see the region down about 0.3%.
Bitcoin is trading at $40,600 while Ethereum is at $2,760.
The S&P closed at 4,357 up a whopping 95 pts…. – Exciting Yes, but does it suggest the worst is over – NO, not at all. We remain in the 4114/4450 trading range. Remember – the S&P did suffer a Death Cross on Monday….and while we could see us rally to resistance at 4450, I would expect to see plenty of resistance when we get there. Remain awake – don’t get caught up in the excitement – stick to the plan.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Corned Beef and Cabbage
Yes, it is St Patrick’s Day – and I do love a good corned beef sandwich….. It is not complicated…. you just boil everything and then serve with mustard and horseradish….
For this you need: 1 lg white onion, 4 lg red potatoes, 1 bag of carrots, 4 cloves of garlic, 2 tbls of sugar, 2 tbls of vinegar, s&p, water, beer, cabbage and 1 corn beef with the spice packet.
Now put it all in a slow cooker…. cover with water and 1 can of beer and cook for 8 hrs….
Slice and serve…. simple – if done right – It is delicious….
Buon Appetito.
