Things you need to know –
– It was both HOT and COOL
– FED heads repeat that ‘there is more work to do…’
– CPI Super-Core? Really? 5+5 = 3?
– Retail Sales due out at 8:30 – Is the consumer broke yet?
– Gold and Oil take a step back, dollar rises…
– Try the Italian Baked Chicken Pieces
The Consumer Price Index – is both HOT and COOL – which makes it interesting……the y/y read was HOTTER than the expectation (6.4% vs. 6.2%) but COOLER than last month (6.5%)….. while the m/m number was on target – which was HOTTER than last month (0.5%)………and what makes this interesting is that the y/y numbers were supposed to be weaker and they were not and all this does is suggest that inflation may be more ‘entrenched’ than not and as a result may not be going away any time soon….Futures which were higher in the pre-mkt turned sour prior to the opening bell as investors and traders tried to decipher what it all meant….then the algos’ sent stocks on a roller coaster ride…up, down, down more and then up leaving the Dow down (but off its low) by 157 pts or 0.5%, the S&P off 1, the Nasdaq up 69 pts or 0.6%, the Russell down 1 and the Transports gained 170 pts or 1.1%.
Comments by different FED members also added to the confusion….Richmond President Tommy Barkin told Bloomberg that ‘if inflation persists at levels well above our target, maybe we’ll have to do more.’…. (Guess what? It is at levels above their target!).
NY Fed President Johnny Williams said the ‘battle isn’t over yet’ while,
Dallas President Lorie Logan said ‘We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions’ (guess what? Conditions are undesired.)
And then Philly’s Patty Harker comes out and said that he thinks policymakers were nearing the point where rates were restrictive enough saying – ‘In my view, we are not done yet, but we are likely close…’ and that is all the algo’s needed to hear….you see, that statement sounds like the FED is about to pause and then pivot….or at least that is what it sounded like to the algo’s……because ‘likely close’ to the finish line leaves the door wide open to interpretation – it is not an outright hawkish tone the way William’s, Barkin’s and Logan’s was….and all that means is maybe there is a crack in the foundation…….. I am not in the camp – that there is a crack at all…. I just think that you hear what you want to hear vs. what is being said….and so it goes….
Now the other reason for optimism is the latest CPI component that we never really heard about, but will now because they need to find a positive in this otherwise negative report…. Are you ready? It’s called the ‘Super-Core Figure’…. something I never heard before yesterday…and I’ve been here for 42 yrs.…and I never heard anyone speak of a ‘Super-Core’ component….but let’s run with it….
Unlike Core Inflation – Super-Core Inflation does NOT have a specific definition – it is a term that expresses price measures that EXCLUDES sectors that economists ‘FEEL’ distort the broader inflation figure. Apparently the Super-Core figure is CPI EX Food and Energy (core) MINUS housing….and when you strip that out – the Super-Core rate only rose by 0.3%…. – well of course it did – you are eliminating parts of the equation….
So, for example – it’s like this…. add it up –
4 (food)+3 (energy)+3 (housing)+5 (services) = 15
but if you want the super-core, you eliminate the food, energy and housing that leaves just 5 – so the answer goes from 15 to 5! It’s magic…. ….Why don’t you just take everything out and the CPI will be zero…. That’s good, no? Yeah, until you go to the supermarket, or pay your electric bill or try to fill up your car with gas…. then suddenly – it’s not zero….Whatever!
Let me remind you – on the Economic Calendar – they only have CPI and CPI Ex Food and Energy…. they don’t have nor have they ever had a ‘Super-Core’ figure – Never! Which leaves me to ask – How come we never heard of this Super-Core figure before? Again, no answer required – it’s rhetorical.
Now – all this means is that the data suggests to me and others – that the FED will raise rates by 25 bps in March, May AND June before they even consider pausing – recall that the surge in stocks was born on the ‘hope’ that the FED would pause in March and then pivot sometime over the summer….….So, the pause decision can’t be made until we get the April, May macro data to see how strong or weak it is….and the idea of a FED pivot (cutting rates)? Yeah, that is not happening in 2023…..so what will stocks do now? Will they take it all back? Will they just churn in a tight range? Or will they ignore all of it and push higher? In the end – the fact that both m/m and y/y reads are up – will keep the pressure on the FED if their goal is tamped down inflation.
Today brings us Retail Sales data – and the estimates are strong….m/m +2% vs. last month’s -1.1% – a 3% swing, Ex Autos and Gas of +0.9%, vs. last month of -1.1% – again that’s a 2% swing….and then we have Empire State Manufacturing – and this is expected to be -18 up from -32 last month….Industrial Production of +0.5% vs. last months’ -0.7% and Capacity Utilization of 79.1%.
The CPI data sent the treasury market tumbling causing yields to rise…. Remember that when investors are worried that bond yields won’t keep pace with rising inflation – demand dries up, bids move lower, prices fall, and yields rise….and that is what we saw yesterday…. the bond market is telling you that inflation isn’t ‘transitory’. The 3-month T bill now yielding 4.6%, the 6 month yielding 4.8% while the 2 yr. yield jumped to 4.62% up from 4.53%….
Oil – moved a bit lower….falling 90 cts to $78.20…..The API (American Petroleum Institute) reported that US crude stock piles rose by more 10.5 million barrels….causing Stevie Brennock – Oil broker at PVM to tell us that we are ‘swimming in oil’ The EIA is due to report it’s data today. The CPI data and comments by a slew of FED officials is a subplot – spurring worries that higher rates for longer will send the economy into a deeper recession causing demand destruction. I’m shocked they left the China re-opening out of the conversation yesterday…. but they’ll save that for another day. Trendline support is at $77.40.
The dollar index (DXY) which had traded down to $101 and found support is now trading back at $103.55 – up 32 cts….and that makes sense if you think rates are going higher from what the expectation WAS…. Recall that the fall in the dollar from the October highs was all about the FED navigating a soft landing and controlling inflation…. the recent move up is starting to suggest something a bit different. We are just above the trendline at $103.33 and holding tightly. Let’s see what the PPI tells us tomorrow.
Gold is down $20 this morning and down $130 since the early February high – as investors consider the pace of inflation and the FED’s next move. Yesterday’s CPI data only emboldens the FED to push rates higher….Here is how they said it to try and spin a positive…. Inflation rose at its SLOWEST pace since late 2021 – (rose – negative and slowest – positive), YET they are continuing to push rates up and that is what caused gold to retreat…. Gold is now between trendlines – with $1800 as support and $1875 resistance.
US futures are down this morning as investors/traders/algo’s continue to digest the latest report….Dow futures -70, S&P’s -15, the Nasdaq down 50 while the Russell is down 10. On Thursday – we will get inflation at the Producer level 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 yesterday – what does this potentially mean for y/y number? Will it mimic the CPI number? If we see an increase at the producer level – it’s just a matter of weeks before we see it filter down to the consumer level….Capisce?
European markets are mixed. – UK CPI fell for a 3rd month but is still running at 10.1% – below the expected 10.3% The UK and Italy both a bit lower while France, Germany and the Euro Stoxx indexes are all up by about 0.5%.
The S&P closed the day at 4136 – down 1 pt. in what looks like nothing really happened…but we did see the S&P swing in a 60 pt range…. a low of 4095 and a high of 4159 before the bell rang. We pierced the 4100-century mark but then retook it as investors remain resilient and unfazed by the higher CPI read. Again – We remain in the broader 4000/4200 range….and the longer we remain above 4100, the more 4000 becomes significant support in the event of a pullback…. I think 4200 will remain difficult for the markets to pierce in the short term as we digest the data and the FED narrative of higher for longer. The jury is still out on the landing….Will it be hard, soft or just LONG….
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
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Italian Baked Chicken
For this you need: Legs and Thighs – skin on – washed and patted dry, potatoes cubed into 1″ pieces, 6 – 8 garlic cloves chopped, 1 lg yellow onion diced, parsley minced, Parmigiana Reggiano cheese grated, 2 teaspoons dried oregano, olive oil, kosher salt and black pepper.
Preheat oven to 375 and set oven rack to middle.
Cut the potatoes into approximately 1″ to 1.5″ cubes and dry them off as well with paper towels.
In a large bowl combine the onion, garlic, parsley, oregano, grated cheese, and ½ cup of olive oil. Mix well. Season the chicken on both sides with salt and pepper. Add the chicken into the bowl and coat well. Use your hands to massage the pieces.
Layer the chicken into a large baking dish skin side up – lg enough to accommodate the potatoes. Toss the potatoes into the bowl with the remaining olive oil mixture and mix well. Place the potatoes around the chicken.
Drizzle a bit of olive oil onto the chicken and potatoes. Bake the chicken for 45 minutes. At the halfway point baste the chicken and potatoes.
When done – You can broil the chicken for a few minutes to crisp up the skin but watch it carefully!
When the chicken comes out, sprinkle it with a bit more kosher salt (about 1 teaspoon total). Let the chicken sit lightly tented for 10-15 minutes before serving. The chicken will reabsorb some of the pan juices and become moister. Right before serving – toss the chicken and potatoes in the pan juices and serve.
Enjoy!
