Things you need to know ~
- NFP is both stronger and weaker, unemployment declines to 3.5% and wages fall – and stocks rocket higher
- CPI data due out on Thursday this week – expectation is for a decline
- Oil – tests lower on Friday and is rallying nicely today
- Gold about to challenge $1900
- China re-opens, eliminates travel quarantines
- Try the Mushroom/Leek Frittata
Stocks rocketed higher – after the gov’t NFP (Non-Farm Payroll) report showed that job creation – while more than the estimate was BELOW the current trend – so that must be bullish! The original estimate was for 183k jobs to be restored, then they revised it to 203k job on the morning of the report, then we got 223k jobs – so 40k greater than the original expectation and 20k greater than the revised expectation but still less than the trend – which is 250k jobs…….see how they did that? – They took a stronger report but found a way to make it a weaker report – in fact the WSJ called it the ‘smallest gain’ in 2 years….
Then they pointed to a weakening wage metric – m/m wages only rose by 0.3% vs. the 0.4% expectation while y/y wages rose by 4.6% vs. the 5.1% expectation and then add in the weaker ISM Services PMI – it collapsed going from expansion to contraction (55 to 49.6) – and that sent the algo’s into a frenzy…..not knowing what to do – they shifted into overdrive as the weakening data suggests a FED pivot – as they tried to take back the losses suffered after Thursday’s ADP report….because the sense is that the ‘weaker’ eco data tells us that the FED policy stance MUST be working and then guess what else? Yup! That MUST mean that FED is ready to not only pause, but pivot and start to cut rates sometime later this year – Never mind that inflation is still running at a healthy 7.1% – well ahead of any wage gains, so it makes me think that this ‘knee jerk’ reaction is just that – a knee jerk reaction.
Now, let’s be clear on that….Pause maybe (at some point) but pivot? Not happening this year – UNLESS the metrics fall of a cliff and the inflation rate drops from 7.1% to 2% sometime in the next 10 months. And that is NOT happening. It took 6 rates hikes to stop the ascent higher (CPI was at 9.1%) and then 3 more to get us to 7.1%…. a 2% decline, last time I checked – we are still 5% above the target rate of 2% which only leaves us to wonder….
Did you even listen to any of the FED officials that spoke last week? Not one of them hinted at anything other than continued hikes and ‘more work to do’ before we see any relief. Now, the action is telling you that the market does not believe the FED and how do I know that? – – because fed fund futures are suggesting it. And fed fund futures are the bets that investors make – has nothing to do with FED policy….The market is pricing in a range of 4.25% – 4.75% – the FED has told us that 5%-5.5% is what they consider a neutral range – Neely Kashkari called for 5.4% last week– so 4.75% while close isn’t within the range and that suggests that the market (investors) don’t believe what the FED is saying…they are under the impression that the economic data will get weaker and weaker in the next couple of months – weak enough to force the FED to change their narrative -and BINGO – that is why stocks rocketed higher…
The Dow ended the day UP a whopping 700 pts or 2.1%, the S&P gained 87 pts or 2.3%, the Nasdaq rallied by 265 pts or 2.6%, the Russell up by 40 pts or 2.25% and the Transports knocked it out of the park – adding 455 pts or 3.4%!
Every one of the 11 S&P sectors was higher and the sectors that have been beaten up last year – enjoyed an even bigger move…..Semi’s SOXX rose by 4.7%, NVDA +4.2%, AMD +2.7% and INTC rose by 4.6%. Artificial Intel rose by 2.8% Consumer Discretionary + 2.4%, Housing +2.4%, Retail +2.6%, Tech +3%, Basic Materials + 3.4%, Real Estate +2.9%. Even Energy rose on a down day for oil – XLE +2%!
Mikey Arone – Chief Investment Strategist at State Street Global Advisors told the journal that ‘investors are celebrating the fact that the average hourly earnings number was less than expected.’ The takeaway – there is this ongoing fear that we are about to ENTER a wage/price spiral type of inflation…. Guess what Mikey? Enter? We are already in a wage/price spiral type of inflation. ADP report showed 7% wage gains for loyal employees and 15% wage gains for those that switched jobs – all in reaction to a tight labor market and out of control inflation that is now almost a year old – leaving employees in charge of wages…. And where do you think that money is coming from? Lower prices or higher prices to the consumer? Answer: Higher prices!
And then you have all the FOJ (Friends of Jay) tell us that a soft landing is a real possibility…..to which I say – Challenge! Now, asset managers have grown hopeful that inflation will cool and the FED will pivot this year….and while I too would like to see that, I just don’t see it (yet). Look – the minutes from the last meeting revealed that FED officials ‘expect to keep raising rates’ in case price pressures prove more persistent….Now, they could prove to ‘less persistent’ and if that’s the case then the FED will have to rethink the plan….so in the end – it is all very fluid – while there is nothing cast in stone – it just doesn’t feel like we are about to change the plan just yet.
And all that means is that you must remain diligent….allocate accordingly – don’t eliminate sectors that you think might be poor performers, just underweight the sector and pick the best and brightest in the group, so that when it does turn around – you’ll already be ‘in’ and you won’t have that FOMO reaction – which I always think is comical… You won’t have the fear of missing out if you’re NOT out….Capisce?
Ok, next –
Oil – ended the week at the lower end of the trading band – closing on Friday at $73.77…after they once again succeeded in telling the global slow down, demand destruction narrative – this after that ‘stellar’ NFP report that suggested that not only is the FED’s plan working, but we can all expect a soft landing, not a recession. In addition we are learning that the weather across Europe hasn’t been as cold as Vlad was hoping for and that the countries across the continent appear to have plenty of supply of both oil and natural gas….so that does take some of the pressure off of higher prices.
In any event – we are at the lower end of the trading range and I would expect to see oil rally from here – b/c don’t’ forget the Saudi’s are watching the price of oil like a hawk – and if there is any sense at all that it breaches the lower band ($70)– expect them to rattle the cage about production cuts – just like they did on Wednesday – when we saw oil spike to $80/barrel again…. In addition remember that Joey has to refill the SPR and is looking to pay $70 barrel – so there is an implied floor here. This morning oil is trading at up $2.50 at $76.30. Hello???
Gold – climbed to its highest prices in 7 months and ended the week at $1869 – after trading as high as $1875/oz.….giving support to the story that the precious metal is on track to challenge the 2022 highs at $1900.. Like I said last week – I think gold has a $2100 price target on it this year, so buying on pullbacks would be the plan. This morning – Gold is trading up $9 at $1878 an oz after trading as high as $1885…..
Treasuries – Bonds did rally a bit on Friday – sending yields a bit lower…the 3 month and the 2 yr. didn’t move much at all, but the 10 yr. yield plunged…going from 3.72% Friday morning to 3.55% Friday afternoon. And that makes sense if you believe that the FED is nearly done with rate hikes or will become ‘less hawkish’ – the longer term bond will move first –and that is what we saw. But, you know how I feel….Enough said.
This morning US futures are up….Dow futures + 70 pts, the S&P +15 pts, the Nasdaq + 55 pts and the Russell up 7 pts. Investors driven by expectations of slowing rate hikes and a re-opening in China. But don’t kid yourself – Thursday’s CPI data is top of mind….and while there is some pressure for the FED to raise rates by 50 bps on February 1st, that pressure appears to be easing with 25 bps now the call….JJ is clearly very frustrated with the disconnect between what the markets are pricing in for future policy vs. what he is telling us. I.e. – When will they pause? When will they pivot? And this disconnect could force JJ to raise rates more than that expectation to show ‘who is in charge here’.
Eco data this week is really all about the CPI (Consumer Price Index) and what that tells us on Thursday….Now look, it is expected to be down and that is good. Top line m/m is expected to be flat vs. last month’s 0.1% increase….Ex food and energy m/m is expected to be up 0.3% – greater than last month’s 0.2%, Y/y top line is 6.5% down from 7.1% and Ex food and energy of 5.7% down from 6% – but it is still well above the 2% target – so while we are moving in the right direction – we have more work to do!’ – (Atlanta Fed President Raffi Bostic). Add in the Kansas City Fed President Ester George comments that warned of difficulty ahead as the FED attempts to balance inflation and employment and you can see that this won’t be a walk in the park. We are also due to get Real Avg Hourly earnings y/y and Real Avg Weekly Earnings y/y – what will those show? Will they also be in decline continuing the trend?
And we begin the quarterly Beauty Pageant….Earnings season….and that starts in earnest on Thursday with announcement from some blockbuster US names….JPM, UNH, BAC. DAL, BLK, BK, WFC and C….You know these guys right? Let’s see what they have to say….about the state of the economy. Goldman is kicking the week off by eliminating 3200 sales and trading positions leaving many to ask -who is next?
Next – the WSJ sets the stage…..
“Wall Street Sets Low Bar for Corporate Earnings Season”
Expectations are for the first y/y decline in earnings since the crush of covid, yet it will be interesting to see who ‘beats’ the estimates and by how much. Remember – that we usually get a 75% beat rate…just a metric to keep in mind as the season begins.
European markets are up – we can thank the China re-opening for the feel-good mood. China resumed quarantine FREE travel signaling an end to the disastrous zero covid policy. At 5 am markets across the zone are all up by about 0.25%.
The S&P closed the day at 3895, up 87 pts…in what was nothing short of spectacular….Well, January 6th was 3 Kings day (the Epiphany) this year and that is the day that the 3 wise men saw the baby Jesus for the first time and brought him gifts of Gold (it rallied), and Frankincense and Myrrh – So, while Santa may have disappointed us this year – the 3 kings did not!
Recall on Friday I suggested that 3800 seemed to be a level where we could find support and that we were about to find out if we were gonna hold it….well, we did and then we rallied hard to pierce the down trending 100 dma at 3886. This morning futures kissed and then penetrated the upward trending 50 dma at 3904…..so that leaves us to challenge the longer term down trending 200 dma at 3996 – a 100 pt. or 2.6% move higher from where we closed on Friday….Clearly something we could easily do….especially if the FED pivot narrative gains momentum.
Remember – there are still some big banks calling for the market to trade lower – MS and GS are calling for S&P 3000 – but we know how quick that can change… This week’s CPI and the start of earnings season will be the focus and if the CPI does retreat as expected – then the path of least resistance will be UP and not DOWN…..at least in the short term. …but I would remind you that the FED mins are very clear – they are not pivoting or pausing anytime soon….slowing the rate of increases is not stopping the increases, just to be clear…. Stay focused.
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
Mushroom/Leek Frittata
A frittata is kind of like an egg omelet – but different. You can use whatever you like to make it, meats, veggies, cheeses whatever. Today we are making a mushroom, Leek Frittata. It is simple and delicious….serve with toasted Italian bread and home fries. This is a fluid dish – be creative.
For this you need: 12 eggs, leeks, sliced mushrooms, goat cheese (or shredded Gruyere or Fontina), heavy cream (or you can use sour cream) , s&p, butter, olive oil.
Preheat your oven to 350 degrees.
On the stove – turn the heat to med and add a ¼ stick of butter and a splash of olive oil to an oven proof frying pan (Teflon) – add the leeks – white and pale green parts only – sliced thin. Allow them to soften. Now add the mushrooms – and cook them for about 10 mins more and let it all blend. (Let the water it creates evaporate)
In a large bowl whisk the eggs and add in either ½ c of heavy cream or ½ c of sour cream (not both), add softened goat cheese (or the shredded cheese- your call), Season with s&p. Now add the eggs to the frying pan and let it set – maybe 5 mins….now place the whole pan in the oven and bake for maybe 10 mins – or until it is firm and beginning to get golden brown on the top.
Remove and serve with hot coffee and your favorite juice.
Enjoy
