Things you need to know
- The bleed continues – more hawkish commentary out of another FED head
- Real rates need to get into positive territory? Oh boy….
- Talk of higher rates send the dollar up and commodities down
- Treasury yields up – and the curve remains inverted
- Try the Hot & Sweet Italian Sausages w/peppers, onions & mushrooms
The lights go down, the music plays…. the crowd readies itself……
Enter stage left – Cleveland Fed President Loretta Mester…. the stage is dark and then bam…. a single spotlight – aimed directly at Retta…. the music stops, and then she dropped the bomb….
So, if anyone was thinking that the FED was going to navigate a soft landing – you should think again…. As I have been saying for a while now, Soft and Landing will never be used in the same sentence during my lifetime…. …. Retta put it this way –
“My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there, I expect rates to remain elevated for some time…..”….and then she nailed the coffin shut – “I do not anticipate the FED cutting the fed funds rates target next year.”
Recall that on Tuesday Johnny said that ‘combatting inflation would require lifting the fed funds rate above 3.5% and then keeping it there through next year’…the whole of next year….and that means January – December of 2023…so now we’re into 2024 already…. Capisce?
Taking her cue from both JJ (Powell) and Johnny Williams she invoked the ‘for some time’ phrase and then capped it off by saying that “real rates will need to move into positive territory” …. So, let’s just unpack that for a minute….
Real rates = Fed Funds Minus Inflation….so currently real rates are negative….
2.5% (fed funds) – 8.5% (CPI) = -6%….
So, she said that ‘real rates must move into positive territory…. Hmmmm – so just think about that…. If inflation does NOT come down – then that means that FED Funds would have to go somewhere NORTH of 8.5% in order for real rates to be positive, no? Or if inflation comes down to 6% – the FED Funds would have to be better than 6%…, do you see where this is going? Unless they get inflation to under 4% then I just don’t see how they can stop raising rates any time soon – can you? (Because 4% seems to be the number they are targeting for fed funds)….and I keep saying – not happening…. but remember – I am a baby boomer; I remember when inflation was 13% and Fed funds were 21% leaving the real rate of interest at 8%…. capisce? And let me remind you – it was NOT pretty…at all…. unemployment was 10%… And if you don’t believe me – just ask anyone born before March 29, 1961!
Ok – so, what started out to be what many thought would be an up day – quickly soured and by the closing bell, the indexes once again ended the day in a pool of blood. The Dow lost 280 pts or 0.9%, the S&P closed at 3955 down 32 pts or 0.8%, the Nasdaq lost 67 pts or 0.6%, the Russell gave back 12 pts or 0.6% and the Transports lost 145 pts or 1%. And because it was the final trading day of August we can look at how the indexes did for the month….the Dow, S&P and Nasdaq were all down by about 4.5%….+/- , the Russell was the best performer down 2.5% for the month while the Transports got slammed – losing 5.6% for the month.
10 of the 11 sectors ended lower – with Basic Materials – XLB down the most – 1.2%, Tech – XLK, Consumer Discretionary – XLY, Energy – XLE, all fell 0.9%, Industrials – XLI -0.8%, Financials – XLF -0.7%, Consumer Staples – XLP, Healthcare – XLV and Utes – XLU all falling 0.6% while Real Estate gave back 0.4%. Communications – XLC was the only winner – gaining 0.2%. And that includes names like – FB, GOOG, NFLX, DIS, T, CMCSA, TMUS….
The contra trades have had a field day over the past 4 days…. the PSQ, SH and DOG all up – leaving them up 23%, 15% & 11% respectively.
Semiconductors continue to struggle – the SOXX etf losing 4% taking that group down 31% ytd…and then after the bell we learned that the US gov’t is now restricting future sales of ‘chips’ that are used in AI software to China & Russia. So, two names come to mind…. NVDA and AMD…and both got slammed in trading after the bell…NVDA down another 5.5% on top of the loss of 2.4% suffered during the day and AMD lost 3.7% on top of the 2.4% loss during the day.
To be clear – the move is intended to address the military risk (think China and Russia) that these chips present. AMD came out and said it’s a non-event for them, while NVDA is trying to do a work around…. Convenient that Nancy and Paul Pelosi sold all of their NVDA days before she went to Taiwan and one month before the US announced this NEW regulation…. but I’m sure it’s nothing.
And speaking of Taiwan – last night they shot down an ‘unidentified’ civilian Chinese drone…. this after China increased their military exercises around the island after Nancy’s visit there last month…. This coupled with the news that the US is about to sell $1.1 billion worth of missiles and radar equipment to Taiwan…. just saying…you can feel another storm brewing in the Asia/Pacific region. But I’m sure it’s nothing.
Treasury yields rose – as prices continue to fall – all while the yield curve remains inverted – do I need to say more?
Oil – which has once again gotten slammed over the past week – is down again this morning…. recession worries, a stronger dollar, and a new lockdown of 21 million people in Chengdu, China – only adding to hysteria over falling oil prices all while crude inventories continue to fall around the world. Deteriorating economic conditions suggesting demand destruction is what traders are focused on. Just wait until the Saudi’s cut production to stop the bleed. At 6 am – Oil is down $1.25 – trading at $88.14/barrel…taking it below all 3 trendline supports as it looks to find stability at $85 ish.
Today is September 1st and it is a new month and the final month of the 3rd qtr.……and stocks are not feeling good……futures this morning are pointing lower….Dow futures down 110 pts, S&P’s down 25 pts, the Nasdaq down 120 pts – the NVDA/AMD story not helping that index, and the Russell losing 14 pts.
Here are just a few things to consider –
Continued hawkish commentary out of the FED, rising treasury yields that leave the curve inverted, a weakening global economy, falling earnings estimates, threats of larger rate increases out of the ECB and the BoE, inflation around the world at 40 yr. highs with no relief in sight, a very contentious mid-term election cycle, the Chengdu shutdown over new covid cases, the US gov’t restrictions on chip sales to China and Russia, the shutdown of the Nord Stream II pipeline to Europe, the building geo-political pressure between Taiwan, China and the US, the breakdown of technical supports across the indexes, tomorrow’s NFP report, the coming long weekend, the start of a seasonally weak time of year, trillions of dollars of new spending and billions of dollars of new taxes are all weighing on sentiment. Need I say more?
Now – while all of that is true – it is not the end of the world, but it does require you to be a bit more dynamic….and not so static. Expect the market to continue to chop, expect that we will re-test the June lows of 3650 ish….and hope that it holds…I think it will, but it may not….Remember both MS and GS are calling for lower lows on the S&P….in fact 3300 and 3000 respectively before we find that bottom….I think that’s a bit dramatic, but what do I know?
Monday, I indicated that the short term trendline support at 3996 was a KEY level that needed to be watched…. If it didn’t hold then a test of the June low would be expected….and if that were to happen that would be a 10% move lower in the S&P from where we are today…. And while that is ugly – it is completely possible….
Gold is on its way to testing the $1700 level…..it is down $12 this morning at $1714/oz…..Hawkish comments out of every FED head – helping to push the dollar higher is causing commodities to suffer…And remember – it is the end of summer and volumes are lower – and that is causing exaggerated moves across a range of asset classes.
The VIX is up 4.5% this morning trading at 27…. still not enough to cause capitulation…. but it is causing some increased anxiety. Remember – 40 is the level that many believe will ignite capitulation….so sit tight.
Eco data today includes S&P US Manufacturing PMI of 51.3 – edging ever closer to the neutral line (50), ISM Manf PMI of 51.9 – also edging closer, construction spending – exp of -0.2%, challenger job cuts and total vehicle sales…and Friday – brings us the NFP report…. but remember – it is also the beginning of the long Labor Day Weekend…. lots of empty desks leaves the algo’s in charge….and we know what happens when you unleash the algo’s.
European stocks are all lower this morning as the new month begins…. its ALL the same issues…. I noted above…. higher interest rates, a looming economic calamity, political and civil unrest, Energy concerns blah, blah, blah….… The ECB is expected to raise rates by 75 bps next week. They are way behind the curve – something I have been pointing out for months….and leaders there expect inflation to remain elevated until at least thru the summer of 2023……’at least’. At 6:30 – markets across the zone are down about 1.25% or more.
The S&P closed at 3955 down 31 pts……leaving it flailing….as it searches for a bottom…..Yesterday I told you that the chart suggests that it could be 3 places….3955 ish (weak), 3740 ish (weak again) and finally the June low of 3665….which takes us back to the September/November time frame 2020…. Well, we are at 3955 and it looks like that won’t hold…. which leaves us to consider what’s next. Look – no one said this was easy – but what you need to do is stay focused, build a cash position and be patient. If you own good, solid US mega cap names that are decent divvy payers then sit tight. Sectors to be overweight in? Energy, Healthcare, Utilities & Consumer Staples all fit that bill. But you have to balance that with where you are in the life cycle…younger = more risk, older = lower risk. It’s just a math problem.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Hot & Sweet Italian Sausages /Peppers, Onions & Mushrooms
Considering that the market is giving us both Hot and Sweet – this seems appropriate…
For this you need: 1 lb. each of hot and sweet sausage, green, red, and yellow bell peppers sliced, garlic (smashed), 2 large onions, sliced mushrooms, olive oil and s&p.
Spark up the grill – get it nice and hot.
In a large sauté pan – heat the olive oil and add in the smashed garlic. Sauté, now add the sliced onions, sliced peppers and mushrooms…it will look like a lot – but once they start to cook – they get soft and melt a bit. Season with s&p.
Now – put the sausages on the grill and cook – making sure to turn them to cook evenly. When they are done you can do it a couple of ways. Leave them and serve with the peppers, onions, and mushrooms – like a submarine sandwich or you can slice them into bite size pieces and mix with the peppers, onions and mushrooms and serve on a large platter.
Make sure to have roasted potatoes and a large mixed salad to serve with this. This makes a great Labor Day BBQ dish…. Simple to make and it goes a long way.
Buon Appetito.
