Things you need to know –
– Stocks got smushed….PCE stronger than expected – OK- was that supposed to be a surprise?
– Bond yields rise, dollar index rises, gold falls
– Oil bounces off of the low – Goldy puts out another note
– 3970 is now trendline support – will we hold?
– Try the Pan-Fried Chicken Thighs in White Wine
Here is my weekend appearance with Maria Bartiromo on Wall St Week
https://video.foxbusiness.com/v/6321183073112#sp=show-clips
Stocks got punished a couple of times last week – Tuesday and then again on Friday…. A realization that inflation is and will be more of an issue is hitting home and Friday’s PCE report only made that even clearer……Friday’s report showed that the FED’s favored gauge of inflation is rising more than (and faster) than expected…..the m/m number coming in at +0.6% (vs last month of +0.1% – which was up to +0.2%) and the y/y top line number came in at 5.4% (vs. last months 5% which also go revised up to 5.3%) and when you go to CORE PCE – which eliminates some of the more volatile sectors – what did you see? The same thing – rising inflation beyond all expectations….and so – that wasn’t good and the sell algo’s immediately went to work, while the buy algo’s pulled their bids and moved lower….not out of the market – just reentered them at prices that reflected a 1%, 2% or even 3% discount from where they were the day before.
By the end of the day the Dow lost 336 pts, the S&P lost 42 pts, the Nasdaq gave up 200 pts, the Russell lost 17 and the Transports gave up 80 pts.
For the week the Dow gave back more than 1000 pts or 3%, the S&P lost 120 pts or 2.6%, the Nasdaq gave up 390 pts or 3.4%, the Russell lost 56 pts or 2.8% while the Transports gave back 506 pts or 3.3%.
Now, while I get the fact that the inflation report was stronger than expected – I have to ask – did anyone really expect a different outcome considering the prior week’s inflation data (both CPI And PPI) revealed the exact same thing? …I am a bit surprised at the reaction…. it’s not like we didn’t know this – or should I say, it’s not like the humans didn’t know this- for sure the algo’s appeared surprised – and when they are surprised we usually get an overreaction…..
Now – if you draw the trendline ‘resistance’ from the highs of April 2022 to the high January 18th 2023 You’ll see something very interesting…..The trendline acted as resistance the whole way down…Until January 23, 2023 – that is when it broke out and UP thru the resistance…..and then traded as high as 4195 on February 2nd. After last week’s action – guess where we are? Right back at the trendline….except this time we are sitting on the line which is now SUPPORT….Capisce? So this week is KEY….will we hold that support and build or will we fail and then fulfill the Morgan Stanley narrative? Remember – Their narrative is S&P 3000 – which is a 24% decline from here…something I do NOT agree with. But that is what makes a market – both buyers and sellers.
Look, the market is repricing risk – the path forward remains volatile and all signs are telling you to be careful, it is just like JJ said back in January…..’Curb your enthusiasm’…..higher stock and bond prices will make his job that much more difficult if it is accompanied by stubborn inflation (the thought here is that higher asset prices will make investors feel wealthier and that will continue to fuel demand – something he is trying to kill) so he will attempt to jawbone the markets lower while pushing interest rates higher. I suspect that a test lower – if and when it comes will see us test S&P 3600 – the lows of Sept/October 2022…. which represents a 9% pullback from here…..which feels much more realistic vs. the 24% that Mikey Wilson is calling for.
In any event – there is a lot of eco data coming at you this week….Durable Goods expected to be -4% – a stunning reversal from last months +5.6%, Pending Home Sales of +1% – but with mortgage rates rising and housing prices falling I am betting that we will see a negative number, to confirm that we will get the FHFA Housing Price Index of -0.2%…..By the end of the week we will get reads from the Dallas, Chicago and Richmond Federal Reserve banks and they are all expected to be lower….
Oil – oh wow, look at that! It is trading at $76.80 this morning…up 4% or $3 off of last week’s low…after trading down only to find support at $73.80 ish (as discussed)…Our friends at Goldy putting out a note to investors yesterday telling them that OPEC has ‘elevated pricing power’ when it comes to the oil prices. Wow, how insightful! Their analysis – once again – plays both sides of the fence.
On the one side they are calling for OPEC to reverse their supply cuts in June – when it is expected that demand will exceed supply putting the market into a deficit forcing prices higher – Brent crude at $90 and WTI at about $83 (up 9% from here) and then they tell us that BUT – Don’t be so sure….OPEC could decide to do nothing – keeping those production cuts firmly in place because WTI at $83 or Brent crude at $90 ‘may not be higher enough to require a move by OPEC.
Remember the sweet spot for the Saudi’s is to have WTI trade between $80/$90/barrel and for Brent to trade between $90/$100 barrel on AVERAGE for the year….Which means it needs to trade even higher to get the average UP. The trading range this year is $73/$84 – leaving it well below what they want – and since they are the swing producer – they hold the key. IF they keep supply cuts in place and demand rises then Goldy says that we will see Brent trade at $107/barrel leaving WTI at about $100/barrel. See how that works???? And to think – we have plenty of our own oil and we were the swing producer during the prior administration. WTI was trading at $46 when Joey took over only to see it rocket higher by 132% to trade as $103 in June 2022 before backing off 24% as of this morning to trade at $76,80. In any event – expect oil to trend higher as we move from winter to spring.
Gold – continues to come under pressure as the inflation story remains hot….remember – strong inflation will force the FED to raise rates and that will force the dollar higher – putting pressure on the precious metal…….Recall…..Gold surged higher by 8% during January as the dollar index fell by about 4% during that same time….when all the talk was about how the FED was going to pause and then pivot – and that they succeeded in controlling inflation….How’s that working? Apparently they have not controlled it, rates are going higher, the pause has been pushed out to at least June and the pivot ain’t happening….Gold has given up all its gains and the dollar index has taken back all its losses….Now, if the dollar continues to push up then expect gold and other precious metals to push lower. $1800 is the key to watch for gold – currently trading at $1815 while $106.50 is the level to watch for the dollar index – currently trading at $105.70.
The bond market is also forecasting higher rates…the 3 month T- bill is yielding near 4.7%, 6 month T- bill is now yielding 5.14% on an annual basis, while the 2 yr. is yielding 4.84% and the 10 yr. is kissing 4%. 1 yr. CDs are paying a bit more than 5%. 30 yr. FHFA mortgages are now hovering near 6.7% – up from the 6.2% last month – when it was expected that the FED would stop pushing rates higher.
In any event – it continues to be a volatile time for investors and the markets….Expectations for a terminal (neutral) rate are now anywhere between 5.5% – 6% – depending on who you are talking to and what day it is…and now there is even (some) chatter of the terminal rate having to go even higher (I am not in that camp) and if they do, it will put upward pressure on yields and downward pressure on bond prices and downward pressure on stock prices. Upward pressure on mortgage rates and downward pressure on housing prices. Upward pressure on the dollar, downward pressure on gold – do you see a pattern?
And just a side note – they tell us that the FED is succeeding in taming inflation because used car and housing prices are coming down….Well of course they are – loan rates to carry houses and cars are going UP – so prices have to come down to reflect higher rates, but what they are missing is the COST TO CARRY IS STILL GOING UP no matter that the prices are coming down because they haven’t come down far enough to balance it out…(yet) … Do you realize that auto companies are running credit at 10% rates for used cars and offering to finance out 72 months to ‘make it affordable’ 10%! A $25,000 used car loan for 6 yrs. at 10% is $463/month….and if you opt for 5 yrs. it jumps to $531/mo. while a 4 yr. loan would cost you $635/mo. Let that sink in….and then you want know why used car prices are in decline? Let’s not even discuss new car prices and financing options…
US futures are up after the beating stocks took on Friday…. (which was, as I said just a bit of a surprise – considering that we didn’t learn anything new – inflation is sticky and rates are going up….). Dow futures are up 140 pts, the S&P’s up 20, the Nasdaq is ahead by 70 and the Russell is up 10. We are sitting right on that trendline support I pointed out at the top of the note….So, a bounce from here would be seen as a positive….at least for today…..The conversation and the eco data this week will help sort out what’s next…
European markets are all higher today as well. Up better than 1.25% across the board….European investors are now pricing in an ECB peak rate of 3.75% – currently it is 3% – so they too are expecting ongoing rate hikes thru year end….and ECB President Christine Lagarde has also been very clear about this….so no one in Europe or elsewhere should be predicting an ECB rate cut anytime soon. Eurozone economic and consumer confidence is due out later this morning.
The S&P ended the day at 3970 down 43 pts…..which was up from the low of 3943 (which is 200 dma support). Remember – we are sitting on trendline support right now at 3970…..the 100 and 200 dma trendlines are just a hair below at 3914 and 3940 respectively. My sense is that we will see some consolidation for stocks this week as we digest the most recent data and digest the latest FED speak. There aren’t any FED speakers scheduled to make any formal presentations this week, but that doesn’t stop any of them from opining on market action if asked.
Remember, the market wants clarity…. Know what you own and why you own it…. if the fundamentals have changed then reconsider the base case…if you’re nervous – put the cash portion into short duration treasuries for now that will help you sleep at night. Don’t forget to add some of the contra trades to offer downside protection. Remember – the market has never stopped going down while the FED is hiking….so expect (some) more pressure on the markets until June (we discussed this) – but that doesn’t mean it’s going to collapse (necessarily) it just means we could see cheaper prices in solid names that will offer opportunity to the long term investor.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Pan Fried Thighs in White Wine
This is a great dish – all done in one pan. For this you need:
Preheat your oven to 300 degrees.
Chicken thighs (skin on), sea salt and pepper, vegetable oil, 2 shallots, sherry vinegar, some Pinot Grigio (or other dry white wine), fresh rosemary, parsley, and thyme, chicken stock and butter.
Rinse and pat dry the thighs – season with sea salt and pepper -set aside.
In a large sauté pan – heat up the vegetable oil – until its nice and hot – now place 3 or 4 pieces of the chicken in the hot oil – skin side down – let it cook until it is golden brown – usually about 7 – 10 mins. Do not burn….lower the heat if its too high. Flip and repeat – When cooked – place on a Pyrex dish – put it in the oven so it stays warm….and repeat with balance of chicken. If you have a lot of fat you can remove ½ of it – if not too much – then leave it alone.
Next – add the thinly sliced shallots and sauté for 2 – 3 mins. Now add in 2 tbspns of the Sherry Vinegar – and scrape bottom of pan to get all the bits off. Now add 1 c of the wine and let it come to a boil – reduce to simmer and then add ½ c of chicken stock and let it simmer for about 5 – 7 mins…..do not let it all evaporate or you went too far. Now stir in the chopped herbs and ½ stick of butter – Once it’s all melted and blended – place the chicken on individual plates and pour some sauce over each plate. Enjoy this with a lg mixed salad dressed in s&p, dried oregano, olive oil and fresh lemon juice. Simple it best. Enjoy with the remaining bottle of wine.
Buon Appetito
