Things you need to know –

–         Markets appear to be ‘unconcerned’ about today’s CPI print.

–         A hotter report will be explained away by ‘seasonality.’

–         What will the Services portion say about inflation in that sector?

–         Lots of more macro data as the week unfolds.

–         Try the Apple Cinnamon Pork Chops

Investors just can’t get enough of stocks…. The Dow ended the day up 380 pts or 1.1%, the S&P up 47 pts or 1.1%, the Nasdaq up 175 pts or 1.5%, the Russell up 22 pts or 1.1% and the Transports up 140 pts or 1%.

Every sector – except energy ended higher yesterday……and in what has been the pattern lately – we keep seeing the best moves in 2023 come from the worst performers in 2022.   Tech rose by 1.7%, Consumer Discretionary rose by 1.5% and Communications added 1.4%, Semi’s gained 1.5%, Cyber gained 1%, Disruptive Tech – gained 1.7%, Housing added 2.4%, Retailers added 2.5%, Small Caps added 1.2% while Mid cap value added 1.3%.

Now, the FED released a consumer survey that showed 1 yr. inflation expectations were little changed from the prior month – but this is contrast to what we saw on Friday in the U of Mich inflation survey…it showed that 1 yr. expectations for inflation ticked UP to 4.2% up from 3.9% last month…..so, which is it?  Are expectations moderating or not?  Well, we are about to find out….at 8:30 am…the gov’t releases the monthly CPI report…that is expected to show m/m inflation ticking higher by 0.5% vs. last months revised +0.1% ….while the y/y read is trending lower at 6.2% vs. last month’s 6.5% and if you take out food and energy then the reads are expected to be +0.4% and +5.5% – the monthly number up while the yearly number is lower……..and the issue here – what will investors focus on?  The monthly increase or the yearly decrease?

On top of that – expect to hear how they ‘re-formulated’ the equation that gets us the monthly report…..to better reflect the data…..Housing costs will have a slightly increased role in the result – while used cars,  food and energy will have a lesser role in the equation…convenient, no?  Why?  Because food and energy should take on a larger role considering we use them every day and they make much more of an impact on our daily lives – I mean how often are you buying a house? Or a used car?    What’s more important to you, the fact that your house (temporarily) declined in value by 5% or even 10% or the fact that the cost to feed your family went up by 20% and doesn’t feel so temporary.  Just curious. It’s really a rhetorical question. In any event – anyone that goes to the supermarket doesn’t need the gov’t to tell them what’s happening with inflation……They know….

In addition – pay attention to the core services inflation number…. Because this speaks directly to the US economy that is a 75% services economy. Upward pressure suggests a tight labor market and higher wages and will spook the markets…. Now – a top line number that comes in a bit less than the expectation will explain yesterday’s rally, but a number that is hotter than expected – could see us give back all of those gains and then some….the whisper number is suggesting a hotter number while yesterday’s strong rally is suggesting a weaker number….So, it’s anyone’s guess as to which way they present it.  Again – my sense is that the left media will focus on the declining trend – telling us not to worry about ‘temporary blips higher’ while the right media will focus on the idea that inflation remains sticky causing the FED to remain aggressive.  Let’s be clear – the terminal rate is now somewhere between 5.25% – 6% (up from 4.75% – 5%) …and the pause is not coming until early summer if at all and the pivot – oh – that is not happening in 2023.

On Thursday – we will get inflation at the Producer level in what is the PPI report and that too is expected to show a larger increase in the m/m number while still showing a decline in the y/y number …. After today – you will understand how they will present it and where they are trying to get you to focus……should we concern ourselves with monthly upticks or pay attention to the yearly downticks?

In the end – I expect them to focus on the year over year declines because that tells a better story – the month over month increase will be credited to the new formula and ‘seasonality’ – which they will downplay.  But look, how long have I been worried about declining inflation suddenly turning its head up causing ongoing angst for the FED and higher rates for the country?  I mean headline CPI m/m has been revised HIGHER for 4 of the last 5 months…. – they report it in December and then revise it in January and then report it in January and revise it in February – and they did it again last night – the original read last month showed a decline of 0.1% – then last night it was revised to +0.1% hoping that nobody is paying attention….and these ‘slight’ revisions continue to reveal the inflation is not just going away….which is why – JJ and members of the FED remain aggressive.  Now look, it is what it is and today’s report will be telling but, with the December revision and new calculation method – investors need to be ready for anything….

In addition – look for macro data on Retail Sales, Industrial Production, Capacity Utilization, Philly Fed, and the NY FED survey….

Oil – fell by 50 cts yesterday…..Joey is set to sell more oil from the SPR (Strategic Petroleum Reserve) – another 26 million barrels – leaving it at it’s lowest level in 40 yrs.….while the EIA (Energy Info Admin) said that they expect ‘record’ March production from the 7 biggest US shale basins….Turkey resumed oil exports after last week’s devastating earthquake and that all helped to push oil a bit lower…..this morning – oil is trading down $1.32 or 1.6% at $78.80…..it appears that oil is stuck in the $77/$80 range…..

Now – on the other hand – the UAE is concerned that global oil production will NOT be able to keep up with increased demand in 2024 saying that.

“I’m not worried about demand – what worries us is whether we are going to have enough supplies in the future.”

And that along with the fact that Joey needs to replace all of the oil he sold should help oil remain elevated…in the months ahead.  Recall – street estimates run from $90 – $110 barrel this year.

The dollar index (DXY) which had traded down to $101 and found support is now trading back at $103. Yesterday’s rally and this morning’s rally is putting pressure on the dollar – because the rally suggests that inflation is not a problem….and that the FED will pause….OK….you can go with that if you want.  I am in the camp that inflation is sticky and that the FED will continue to push rates up which leads me to see a higher dollar in the weeks ahead.    

US futures are up this morning as investors/traders/algo’s get ready for the CPI…. Dow futures +45, S&P’s +10, the Nasdaq up 50 while the Russell is up 2.

This (along with yesterday’s rally) suggests to me that someone knows something that the rest of us don’t.  The 1+% rally across the board in the face of what is expected to be a hotter inflation number is illogical….unless of course – investors are no longer concerned about what the FED might do…and instead are focused on what the FED will do AFTER they stop hiking….which could still be months away and remember – the mkt is a discounting mechanism…..

Longer term investors should stick to the plan and put money to work – just not haphazardly….Caution is not a negative…. I want to see what today’s report reveals and then what that presupposes for Thursday’s PPI report.

European markets are also higher ahead of today’s CPI report….and ahead of more macro data across the zone.  At 7 am all markets are up about 0.5%.

The S&P closed the day at 4137 – up 46 pts and now once again above the 4100-century mark.   We remain in the 4000/4200 range….and the longer we remain above 4100, the more 4000 become significant support in the event of a pullback….  4,000 would represent a 3% pullback – not impossible at all…. while a pullback to the October lows of 3850 represents a 7% drawdown – again not impossible if the data suggests that inflation is stickier than most expect. So, sit tight and let’s see what happens.

If you have stuck to the plan – then you’re invested so, if the market continues to rally – you are participating….and if it sells off – you have the chance to put more money to work at cheaper prices. …So, it’s a win win…… I continue to think we will test 4000 again in the next couple of weeks and I think it holds.   As a long term investor, I am happy to let names I like come to me…. rather than chase them higher…. I continue to favor the STPN (Stuff that People Need) as the overweight with Aerospace/Defense, AI, Cybersecurity and SMID’s (small and Mid-Cap) as complements.   

Remember – build a strong foundation…. dollar cost average into it and keep reinvesting all the divvy’s is the plan…. Buy names on weakness (as long as the weakness is not a fundamental shift in the sector or the name). 

Take good care.

Chief Market Strategist
kpolcari@slatestone.com

The market commentary is the opinion of the author and is based on decades of industry and market experience.  SlateStone has conducted reasonable due diligence on the contents, however, no guarantee is made or implied with respect to these opinions, and the information provided is subject to change without notice. This commentary is not intended to be relied upon as authoritative or as a recommendation or advice,  nor should it be construed as an offer, or the solicitation of an offer, to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.  Please consult with your financial advisor for your specific situation.

Kace Capital Advisors is a paid promoter for SlateStone Wealth, please see further disclosure here  and refer to SlateStone’s Form ADV for further disclosures and information about SlateStone Wealth

Apple/Cinnamon Pork Chops –

Here is an interesting and easy recipe that will change the way you think about Pork Chops….easy to make, pleasing to the eye, and delicious…. It takes no more than 25 mins to prepare and serve and is a very popular pork recipe.

You will need:  4 chops – on or off the bone (your choice – I prefer on the bone), butter, brown sugar, cinnamon, nutmeg, s&p, apples and crushed pecans (maybe like 3 tblspn) …..

Season chops with s&p.  In a sauté pan – heat some butter and add chops and brown on each side for about 4 mins – depending on thickness…. While cooking – prepare the dressing.

In a bowl – add 3 tbls of brown sugar, dash of nutmeg, about 1 tsp of cinnamon. – set aside.

Peel and slice the apples into thin slices – set aside.

When the chops are done – remove and place in a warm oven – …add a slice of butter and then the apples, pecans, and brown sugar mix to the pan – cook until tender.  This creates a delicious “apple sauce” –   Do not overcook the apples as they will turn to mush…..When done – present the chop on a warmed plate and dress with the apple/brown sugar mixture….I would accompany with a baked sweet potato sliced open with a dab of butter and a large mixed green salad.  Enjoy with a nice Chianti….

Buon Appetito