Things you need to know
- The US is in a recession – or at least the Atlanta Fed thinks we are!
- 10 Yr Treasuries confirm – what will the FED do now?
- Big economic week and next week begins the beauty pageant
- Try the Grilled Sweet Sausage w/Peppers and Onions
Friday July 1st, 2022…. What would stocks do? Would they continue down the path of least resistance – Lower – or would they find support and begin the second half of the year on a positive note? Eco data on Friday revealed that US manufacturing PMIs remain steady – at lower levels – but have not entered contractionary territory yet. S&P global PMI came in at 52.7 while ISM Manufacturing PMI came in at 53…. weaker than last month and weaker than the estimate but still in ‘expansionary’ territory. Remember – 50 is the dividing line…. anything north of 50 is expansionary, anything south of 50 is contractionary.
The Atlanta GDPNow forecast got revised yet again…..for the second quarter and THAT was not pretty at all….Recall that on Wednesday last week – it entered negative territory moving from 0% growth to -1% growth and then on Friday evening – it got revised lower yet again…going from -1% to -2.2% – making the second quarter of 2022 even weaker than the first quarter – which came in with a final read of -1.5%. Let me remind you – it started the quarter at what some thought would be a +2.2% growth rate – Well, at least they got the 2.2% correct – they just got the direction wrong….
This sent treasury yields plunging – as money moved into the safety space sending prices up and yields down…recall the inverse relationship. 10 yr. treasuries ended the day yielding 2.87% – well below the 3.25% we saw only a couple of weeks ago. The fall in treasury yields helped to support stocks – as the thinking goes – weaker economic data means that the FED will NOT be able to be as aggressive and in fact could become ‘dovish’…….so now, the focus turns to the July FOMC (Federal Open Market Committee) meeting on the 26th & 27th…what will they do now……
Recall that the week of June 8th – investors awaited the Friday June 10th CPI report….- recall that the chatter started to suggest that the report would not be as benign as the Fed wanted us to believe causing speculation that the FED would have to get more aggressive and stocks went into a tailspin….The FED, then in a ‘blackout period’ unable to say anything directly, leaked a story to GS on Friday evening June 10th – after the very strong CPI report that showed inflation was not ‘peaking’ at all….(nor was it in retreat). As instructed – they promptly put out a weekend piece that got ‘picked up by the WSJ’ for Monday’s edition (conveniently) suggesting that the FED needed to consider a 75 bps rate hike – the market which was already under pressure caused stocks to fall even more….S&P fell 12% in 6 trading days….the Nasdaq lost 13% and the Russell gave up 14% – and yes, on Wednesday June 15th – the FED announced a very aggressive 75 bps hike and promised more to come to try and tamp down run-away inflation…..apparently an ‘idea’ that they (the FED) doesn’t understand very well – remember the J Powell comment at the ECB forum – ‘now we know just how much we ‘don’t know’ about inflation’.
Then last week’s eco data started to suggest an economic slowdown – and now the Atlanta FED forecasts a fairly negative GDP for the second quarter and that is getting everyone excited, so now, we must decide – based on the latest GDP forecast – Are we in a recession or not? Remember – 2 consecutive quarters of negative growth ‘used to’ define a recession – yet do not expect anyone in DC to confirm that – because they are changing the definition to reflect the current times…the last thing they need 4 months before the election is an ‘official recession’.
By the end of the day – the Dow gained 325 pts or 1%, the S&P up 40 pts or 1%, the Nasdaq rallied by 100 pts or 1%, the Russell gained 20 pts or 1.2% and the Transports followed suit rising 135 pts or 1%.
Utilities – XLU gained 2.5%, Consumer Staples -XLP gained 1.5%, Communications – XLC +1%, Consumer Discretionary – XLY added 1.8%, Healthcare – XLV + 1.1%, Real Estate – XLRE + 1.8%, Financials – XLF +1.4%, Energy – XLE + 1.5% while Tech – XLK, Basic Materials – XLB and Industrials XLI all added less than 1%.
Sub-sectors like Housing XHB added 3.4% but remains down 34% ytd – (think lower mortgage rates), Airlines – JETS added 2% – remains down 20% ytd (which makes zero sense to me, other than for a trade, as thousands of flights continue to get cancelled and or delayed and pilots – those that are left – get ready to strike). Metals – XME up 0.5%, Semi’s – SOXX lost 3.5% taking that sector down 38% ytd on weakening forecasts (get ready), Disruptive Tech – ARKK adding 3.3%, Infrastructure stocks – IFRA gained 1.7% as Blackrock continues to suggest that investors need to hedge their portfolios with ETF’s that focus on infrastructure and real estate. Coal stocks – which have been outperformers this year will surely continue to march higher – today’s WSJ runs with this headline: Coal Makes a Comeback as Energy Needs Grow. The article describes an ‘energy starved world’ that has and will turn to coal as natural gas and oil prices spike. The value trade – SPYV + 1.3% while the growth trade – SPYG added 0.7%.
This morning – US futures are lower…. Dow futures down 160 pts, the S&P down 25, the Nasdaq off by 85 and the Russell is down 6 pts.
As noted, – 10 yr. yields are at 2.88%. Investors are making a bet that the country has now entered a recession and that will cause the FED to blink – and stop raising rates or at least slow the increment at which it has indicated it will raise rates…..Let me remind you – IF the FED changes course now – they might as well pack their bags and turn the lights off. Yes, the economy is slowing but inflation continues to be an ‘issue’ and that is the focus now.
Oil – which has been erratic over the last month or so as talk of a global recession caused energy prices to retreat…. has traded between $101 & $120/barrel over the last month and this morning it is trading at $109/barrel – leaving it just above the 50 dma trendline. A Norwegian offshore oil workers’ strike (over the weekend) in the North Sea is expected to disrupt oil and gas output now and that is causing oil prices to rise. Output is expected to be cut by 130k bpd or 6.5% of Norway’s production. Rising gas prices continue to weigh on the minds of consumers – and when a reporter asked Joey how much longer consumers would have to pay these sky-high prices- he responded with this – ‘As long as it takes to defeat Putin’ – Hmmm? Considering that we have plenty of our own oil – that is a curious response from the leader of the free world – wouldn’t you agree?
Citibank is now telling us to expect a collapse in oil prices – they have $65 as their year-end target…. all while GS and RBC continue to suggest $150 and $200/barrel, respectively. Now this is going to be an interesting argument…. which investment bank on the street has it correct?
Over the weekend – Joey tweeted this out putting gas companies on notice….
“My message to the companies running gas stations and setting prices at the pump is simple – this is a time of war and global peril. Bring down the price you are charging at the pump to reflect the cost you are paying for the product and DO IT NOW”
And this only reflects the fact that he and members of his administration just do not get it…they apparently don’t understand economics at the White House. If you buy something at $X and sell it at $X – then you do not make any money…. You cannot pay your bills and you go out of business…. but that’s not important right now
It is a big week for eco data…. Today will bring us Factory Orders – exp of +0.5%, Durable Goods of +0.7% and Cap Goods Ordered of +0.7%. Tomorrow brings us S&P US Services PMI of 51.6 and ISM Services PMI of 54…both lower m/m…and since the US economy is a 75% services economy this is a KEY metric. And Friday – brings us the all-important NFP- Non-Farm Payroll report and this expected to show that we restored another 275k jobs – I say restored because we have not created new yet…. we need to regain all that we lost before we can honestly say we created new…. No?
Stocks in Europe are down across the board as momentum fails to build…. The BoE (Bank of England) is due to announce their bi-annual financial stability report later today…while the ECB (European Central Bank) is due to announce their latest policy discussion on Thursday. Eurozone services PMI coming in at 53 – down from 56.1 in May suggesting a slowing economy there as well.
I expect more volatility – this is a big vacation week…. we are now in the Dog Days of summer – volumes typically retreat, and moves can be exaggerated in both directions…which is why portfolio managers leave ‘good til cancelled’ orders both above and below current market levels to take advantage of any outsized swings as they enjoy the sun and fun of the beaches, oceans, and lakes across the country.
The S&P closed at 3,825 – up 40 pts on Friday…. This morning futures are suggesting a lower open as the path of least resistance remains lower…. look for support at 3600 level on the S&P and if we get there and it does not hold then expect the algo’s to go into overdrive – sending stocks lower as they try to shake the branches to see who falls out…
Next week – begins the quarterly beauty pageant…. Revisions are all over the place and investors are reassessing the outlook. If we are in a recession – we need to ask – How bad will it be? Will it be shallow or deep? Will it be long or short? Where can I find safety? What will happen to estimate and forward guidance…. well, hold on…because we are about to find out….
Stay focused…. This is not the time to get rattled…. continue to put money away in tax advantaged accounts….you can keep it in cash and be patient if that makes you comfortable or you can continue to put it to work – taking advantage of dollar cost averaging…..I remain cautious but not hysterical – keep the prize in your line of sight….I expect that we will re-test S&P 3600 sooner vs. later.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Grilled Sweet Sausage w/Peppers and Onions
This is simple to make and is always a fan favorite…and here is another secret- feel free to eat this just as sausage w/peppers and onions OR boil a lb. of rigatoni and toss it all together – dust it with some fresh grated parmigiana cheese and Boom! Another family favorites.
For this you need: 6 sweet sausages, green and yellow bell peppers and 1 lg Vidalia onion, olive oil, s&p and 1 clove of garlic.
Light the Grill – and brush the grate to prepare it.
Start by slicing the garlic, onions, and peppers. In a large sauté pan – add the olive oil – heat it up, toss in the sliced garlic – let it cook for 2 – 3 mins…Now add in the sliced peppers and onions – season with s&p, turn heat to med hi and sauté them until they get all soft and delicious – 15 mins or so….
Now – place the sausages on the grill to cook – careful not to burn – once the grill is nice and hot -you can turn the heat to med. Cook the sausages, turning after 5 mins – making sure it gets a nice even cook. Should take 10 – 12 mins…. remove and bring in the house. Let them rest for 5 mins.
When rested – take a cutting board and slice the sausages into bite size pieces. Toss the sliced sausage into the pan with the peppers and onions. Mix well, so that it all marinates and comes together. Turn the heat down to low – and sauté for about another 5 – 8 mins. Bang, it has done.
So, you can eat this as an appetizer, you can eat this as dinner with a big salad – or you can boil up a lb. of rigatoni and then mix it all together – adding a handful of fresh grated cheese. Serve in a large white bowl and place in the middle of the table to serve ‘family style.’ Yum.
This dish should cost you $40 and if you add the pasta – you can feed 6 – 8 people…. that works out to about $5/person – pretty good, no?
Buon Appetito.
