Things you need to know
- Jay ignites a rally – promises that 75 bps is ‘not being actively considered’
- Algo’s go into overdrive – stocks gain nearly 3% across the board
- Expect the presentation to be picked apart
- Oil continues to surge higher as OPEC meets and reiterates that they cannot replace banned Russian oil
- Try the Orzo Spinach Ricotta Salata Salad
“I’d like to take this opportunity to speak directly to the American people – Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down” …….
The markets churning – the S&P trading around the flat line for most of the day and then at about 2:40 pm – soon after the presser started, he said this –
“The FED is not actively considering raising interest rates by 75 bps at a future meeting – we’ve raised 50 bps today and the feeling on the committee is that we could 50 bps moves for the next couple of meetings.”
And BANG! That statement sent the algo’s into overdrive as the ‘relief rally’ began…. the assumption now is that Jimmy B (St Louis Fed President) spoke out of turn…. that his multiple 75 bps moves comments one month ago – were not a committee favorite (for now) – but all I am saying is – pay attention to the terminology…. Is ‘not considering’ the same as ‘not ACTIVELY considering’? Just sayin – I think he left the door open…….but it makes no difference – the algo’s loved and apparently so did some traders…..Other traders who had set themselves up for another decline – defined as being ‘short the market’ suddenly needed to cover those short positions as prices surged and the need to cover those shorts only added to the excitement when Jay said – ‘ain’t happening’ (right now).
By the end of the day the Dow raced ahead by 935 pts or 2.8%, the S&P up 125 pts or 3%, the Nasdaq rose 400 pts or 3.2%, the Russell gained 50 pts or 2.7% and the Transports rose 465 pts or 3.1%…… Every S&P sector was up more than 2.5%…. with Energy, Communications, Basic Materials, Financials, and Technology all leading the way – up better than 3%.
The 10 yr. treasury prices rose sending yields down to 2.94% – which makes no sense – considering rates are rising and not falling….but let it settle in….Some in the bond market explaining it away by saying that the bond market has gotten ahead of itself and the idea that the FED is not ‘actively considering’ 75 bps proves that point….rates supposedly moved higher on the expectation that we would see 75 bps moves in June & July….but that has now been put to rest – at least until next week.
By July – Fed Fund rates will be 2%….and by year end they are expected to be somewhere in the 3% – 3.25%. Inflation will still be near 10% (if it is not already there) and will show no signs of retreating….
And the balance sheet? Well, they are going to reduce it by $47.5 billion/month for the next 3 months and then take it up to $95 billion/month starting in late summer….Now reducing the balance sheet is another way to remove stimulus and raise borrowing costs….This was not new news – it was laid out last month – so the fact that this didn’t change is a positive.
Next Wednesday May 11th – we are going to get the April CPI report…and what is funny is that as of this morning – my Bloomberg machine does NOT have an estimate of what that number will be – which is a bit curious. Recall how strong the latest PPI report was 11.6% – well ahead of the expected 10.5% – and all this means is that we can expect this month’s CPI to be up again….
Why? – because rising prices at the producer level translate into higher prices at the consumer level….So, let’s not kid ourselves….it would be difficult to see how the CPI could be anything other than higher (now to be fair – some economists will tell you that it takes 6 – 8 weeks for those rising producer prices to hit the consumer – so it could be that we don’t see that reflected in the CPI until the June report) ….In any event – I suppose you could ‘play with the numbers’….maybe tell everyone that used automobile prices are in decline – Now that’s good….Thank God that used car prices are coming down….but what about the cost of living? Food, energy, basic supplies, housing? None of that is in decline and in fact is only continuing to surge higher – so make sure you are focusing on what is important to the inflation story…. I mean how many times a month do you buy a ‘used car’?
Now – This morning – US futures are down…. which should be no surprise at all…. Dow futures down 135, S&P’s down 25, Nasdaq down 100 and the Russell is off by 7 pts. Expect lots of chatter today as analysts and strategists dissect every sentence spoken yesterday….as they look for some tidbit of information that may have been overlooked in all the excitement. Expect all of the bulls to point to the ‘not actively considering’ comment while the bears will continue to suggest that the FED is behind the 8 ball and yesterday’s story will not be the same by month end.
Now it was good that the FED even made a move…. but many will ask – is the current path of interest rates really going to bring inflation down anytime soon? I mean Fed Funds are now 1% and expected to be 2% by August….and 3+% by year end…. ok – great, but inflation will still be near if not more than 10%…. So…what am I missing? I am missing the idea that they think inflation has peaked and will be significantly lower …. I hope they are right…. only time will tell.
Eco data today includes nothing dramatic – initial jobless claims, Cont claims and Unit labor costs…. but tomorrow will bring us the all-important NFP (non -farm payroll) report….and after yesterday’s disappointing ADP report – many are now prepping for a weaker NFP report. New jobs created expected to be 380k, Unemployment 3.5%, Avg Hourly Earnings y/y +5.5%.
Oil rose by 5% yesterday ending the day at $107/barrel and this morning it is up another 0.3% at $108.15/barrel. It is about supply jitters….and more Russian sanctions. In addition, OPEC reiterates that it is NOT possible to replace the lost Russian supply – which goes to the supply issue while at the same time expressing concerns that demand will slow as China continues to bring their cities to a halt…. (Which is baloney…. demand is not slowing….)
The S&P closed the day at 4300 up 125 pts….leaving 2 century marks in the dust – 4100 and 4200 in what was a super excited relief rally – one that I think was a bit overdone, but it is what it is…..I think as we move thru the month and see that the eco data is not in retreat and that inflation is not in retreat – the conversation once again turns to the pace of rate increases…I am in the camp that the 75 bps conversation is NOT over by any stretch…..unless of course the economy goes into reverse….(which it just might – no matter that Jay tells us that we are strong enough to withstand multiple hikes…)
The S&P is still well below all trendline supports and will run into resistance at 4375 ish…. the down trending 50- dma.
Remember it is about sentiment…. Did Jay convince investors that they have it under control or not? Recall that there are some that have been calling for S&P to test as low as 3800, 3400 or even 3200 before this is over. In the end – you gotta stick to the plan.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Memorial Day Orzo, Spinach Ricotta Salata Salad
As Memorial Day approaches and we make plans for the tradition BBQ – try this great side salad – can be made ahead of time and kept cold until you need it.
It is simple to make – no longer than 12 mins max.
For this you need:1lb of Orzo pasta, garlic, olive oil, fresh spinach, Ricotta Salata Cheese and s&p.
Bring a pot of salted water to a boil and add in the Orzo. Let it cook until aldente – maybe 8 mins.
While this is cooking – heat some olive oil in a pan and sauté garlic…. just allowing the oil to take on the garlic flavor – do not burn the garlic…. now remove from heat and set aside. Cut the Ricotta Salata into small bite size cubes – set aside.
When the Orzo is cooked – strain – always keeping a mug of pasta water – just to remoisten a bit. Now return the Orzo to the pot and add back a bit of the water – mix to re-moisten – do not let it puddle…. now toss in the fresh spinach leaves, and the oil and garlic – mix well to coat. (You want just enough oil to coat the pasta – you do not want the pasta bathing in the oil) Now add in the Ricotta Salata and mix again. Put it in a bowl and refrigerate. Done. It is a perfect side dish to any summer BBQ meal or is even good to just eat right from the bowl….
Buon Appetito.
