Things you need to know –
– Stocks test and bounce off the trendline.
– 10 yr. bond yields retreat from more than 4%
– The dollar churns, oil and gold advance.
– 2022 losers continue to be 2023 winners.
– Try the Steak Pizzaiola
Stocks moved higher on Friday – all the indexes up more than 1% – building on the momentum from Thursday….as investors seem to be disregarding the narrative of higher rates for longer….because they have convinced themselves that while the data remains strong – it is only because of the lag effect of the 10 rate hikes…..Data Friday morning – revealed that the SERVICES sector of the economy remains hot…and is in fact getting hotter with each passing month…S&P Services PMI came in at 50.6 and ISM Services PMI came in at 55.1 – putting both data points in EXPANSIONARY territory. The ISM Services Paid data point – declined coming in at 65.6….which is a positive – because it suggests that services costs are coming down….even as services rises…. Which is a bit curious for me….but – it is what it is.
In any event – these data points along with continued labor market strength does support the case for ongoing tightening…yet…the recent comments by two Fed heads – Waller (voting member) and Bostic (non-voting member) appear to be putting that at bay… Recall that Bostic told us that the FED could possibly pause this summer (which is not new news) while Waller said that if the macro data cools down – then he sees a terminal rate of between 5.1% and 5.4%…..which is BELOW what the market has been pricing in – ever since we got those very strong inflationary reports in February that drove the narrative higher…in fact – Cleveland’s Loretta Mester is the one that floated the idea of a 5.5% – 6% terminal rate, soon joined by St Louis’s Jimmy B…Minneapolis’s Neely Kashkhari, San Fran’s Mary Daly, Boston’s Suzy Collins etc…. In any event – not one of the FED members has suggested that the terminal rate go beyond 6%…so many think that 6% was already baked in – so anything less than 6% is a BONUS.
Now, don’t forget that both those Fed heads – played on both sides of the fence – saying that if none of this comes true then they support higher rates for longer…but the algo’s chose to ignore that part of the commentary and only focus on what appeared to be dovish…..causing the algo’s to go into overdrive forcing the shorts to run for cover as well….and when shorts run for cover that means that they become ‘buyers’ (that’s how you cover a short) – so now you have aggressive algo’s accompanied by aggressive short covering and that sent the Dow up more than 700 pts in 2 days…. Taking it from negative 1% to +1% ytd.
By the end of the day on Friday – the Dow gained 388 pts or 1.2%, the S&P up 65 pts or 1.6%, the Nasdaq up 225 pts or 2%, the Russell up 25 pts or 1.4% and the Transports up 70 or 0.5%.
YTD – the Transports are in the lead +13%, followed by Nasdaq at +12%, the Russell – small and mid-caps +9%, and the S&P +5%.
Bonds – 2’s, 5’s and 10’s were all yielding better than 4% across the board on Thursday… while the shorter duration 6 month T-bill is yielding better than 5.1%. Now, on Friday – as stocks rallied – the selloff in bonds abated just a bit causing yields to fall….the 10 yr. falling back below 4%. 30 year money – though, did rise about 7% again….and will likely stay there for the foreseeable future and that is sure to put more pressure on housing.
Every sector was in the green…..and as you might expect money piled into the worse performing sectors of 2022! So we saw strength in Tech, Consumer Discretionary, Communications, – all up better than 2%, all the other broad sectors, Financials, Healthcare, Utilities, Industrials, Consumer Staples, Basic Materials and Energy rose by more than 1%. And again the Value trade and the Growth trade running neck and neck both up 1.6% – leaving them up 5.8% and 5.6% respectively ytd.
As you drill down – we saw even more excitement – Retail up 1.5%, Housing up 2.3%, Airlines +1.9%, Disruptive Tech + 3.6% Semi’s + 1.6%, Artificial intelligence + 3.1%, Metals and Miners up +2.5% -all sectors that suffered in 2022.
Coal stocks were on fire….CEIX + 5.8%, NRP + 3.3%, ARCH + 1.5%, SXC + 2.2% Davey Einhorn of Greenlight Capital – making bullish comments on CEIX and that helped the whole sector rally….Look – anyone who thinks fossil fuels are going by the wayside – should reconsider that stance….now that doesn’t mean that renewables and alternatives are dead on the vine – not at all, but don’t discount the value and opportunity in more traditional energy names.
Oil continued pushing higher…up $1.66 or 2.1%…leaving it just about to kiss $80/barrel… Now remember what I said – if we pierced the trendline at $79 then we would see a push up to challenge resistance at $83.15 and that is what appears to be happening….This morning oil is digesting the move up, trading at $78.65.
Gold surged by $22 or 1.15% ending the week at $1855 all while the dollar fell by 0.5% to end the day at $104.52. The dollar retreating on the idea that the expected 3 – 25 bp rate hikes are already priced in and that there is no need to push higher any longer….Which I think is a bit premature…but today – that is the story.
Eco data this week – includes the very important Bi-annual Humphrey Hawkins Testimony…that is when the FED Chair appears before both the Senate Finance Committee and the House Financial Services Committee to opine on the state of the union….It is always fun to watch – because none of the elected officials even understand what they are asking or what the answer should be. I mean, it’s comical at times….You can’t make it up.. Expect all kinds of questions on WHY rates need to rise and why can’t we just cut them and bring them back near zero. In addition – many will pin the blame squarely – 100% on the FED while I would argue that Congress is at least 40% responsible for where we are. In addition we will get Factory Orders, Durable Goods, Cap Goods Orders and Cap Goods Shipped, ADP employment, JOLTS job openings, Challenger Job Cuts, and on Friday we will get the all-important NFP report…. So it is sure to be an exciting week.
But it is the following week – that will add further depth and dimension to the narrative, that is when we will get the CPI and PPI readings and those are sure to play an important role in how the conversation unfolds over the next 2 – 3 months. Look – the US and global economies are showing ongoing strength – PMI”s around the globe are all now heading back if not into – expansionary territory….and that is despite rising rates, rising energy and rising food prices – which only means that the central banks around the world will have to keep going in order to bring inflation under control.
Recall that the jobs market remains very tight….analysts, traders and central bankers all looking for clues that might point to rising unemployment, a drop in hours worked or a slowing in wage increases all as indications of cooling demand – but those data points remain elusive and so – the game goes on…..When will those data points respond? 2 months? 3 months? 4 months? – It’s been 12 months now since rates began to rise – going higher into the summer of 2022 before the topline number started responding at all…and while it is responding – it is not responding the way we were told it would – all the stuff that we need…..food, energy, utilities, healthcare continue to push higher…which is the real problem….and until we see those parts of the economy retreat – do not expect inflation to retreat…..the 2% FED target is sure to be raised to at least 3% to help make it appear as if they are winning….Remember – It’s all in the presentation…
US futures this morning are FLAT Dow futures -20, S&P’s unchanged, the Nasdaq is +2 and the Russell if unchanged. As discussed – It is all about factory orders – expected to be -1.8%, Durable goods – 4.5% and Cap goods ordered and shipped today….Investors around the world awaiting JJ’s testimony that begins tomorrow. Investors are also anxious to see if treasury yields will retreat after last weeks push higher.
European stocks are a bit higher…..with the exception of the UK – which is down 0.4%. France, Germany, Spain, Italy and the Euro Stoxx all up about 0.3%. China – hosted the national people’s congress – with Xi Xi consolidating his power, while setting a lower than expected ‘economic growth goal’ and that apparently implies much less monetary stimulus. They are expanding their miliary by 7%, science and technology by 2% and the chip industry will expand by 50%. (Think Taiwan – it is the ‘chip’ capital of the world…. A takeover of Taiwan would help meet his goal of taking control of that whole industry, but let’s not jump to conclusions….._)
Markets in Asia mostly ended up – Nikkei +1.1%, Hong Kong +0.2%,
Australia + 0.3%, Taiwan +0.3%, South Korea +0.4% while China lost 0.4%.
The S&P ended the day at 4045.64 up 64 pts or 1.6% – testing and bouncing off of trendline ‘support’ at 3940….pushing up and thru it’s 50 dma at 3987 – leaving it looking like it wants to retest the January highs. Recall that on Friday I said that IF the S&P pushed higher and moved about that trendline – it would be seen as a technical positive causing the algo’s to go into buy mode.
And while I agree that that is true – you can feel the nervousness ….and any headline can change the tone on a dime – and there will be plenty of headlines this week. I suspect that JJ’s testimony will be cautious but open to all kinds of interpretation….and with that comes all kinds of reactions….Was he too hawkish? Was he suddenly dovish? Is he confident that his moves will accomplish the task or is there a hint of nervousness as he tries to control the action…not wanting it to get to optimistic while also trying to prevent it from getting too pessimistic….in the end, it will be the macro data that sets the path for future FED moves.
Remember, Investing is dynamic not static – make the plan and stay the course…. don’t try and time it – take advantage of the opportunities that are created.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Steak Pizzaiola
You will need a couple of things: A couple of nice rib eyes, or T-bones – (about 3/4″ thick), Olive oil, Oregano, garlic, onions, red and green bell peppers, can of crushed tomatoes (not puree), some red wine, salt and pepper…
**crushed red pepper flakes (optional).
In a sauce pan – heat olive oil and add crushed/sliced garlic and move it around for a couple of mins until it is nice and golden… add a sliced white onion and julienned bell peppers – turn heat to medium and cover. When the onions and peppers are soft (about 5 mins) add the crushed tomatoes, oregano and **red pepper flakes. Turn heat up and bring to a quick boil then reduce heat to medium. Add red wine (about 1/2 cup) salt and pepper and let simmer and thicken up… about 10 / 12 mins.
Next – rub steaks with olive oil, salt and pepper – do not drown them – just enough to massage the steaks and prepare them for the skillet. Heat skillet (high) and add steaks (if you have a ribbed skillet this works best) You can sear for about 4 mins then turn over and continue cooking for another 4 mins. Then add the tomato sauce to the skillet – cover and turn heat to simmer and cook for another 10 mins. This should give you a nice medium steak – If you prefer you can let simmer longer for more well done.
When done – remove steaks from skillet – slice into thick strips and arrange on plate. This should be enough to feed 4 adults. Next – stir the sauce in the skillet pan to deglaze – making sure to scrap the pan for any bits left behind. Spoon sauce over the steak and serve immediately. Present this meal with a large mixed salad of Arugula, Boston Bib & Romaine topped with tomatoes, red onions, cucumbers – dressed in a red wine vinaigrette. For wine – enjoy a nice Brunello di Montalcino.
Buon Appetito
