Things you need to know –
– Day two – reveals nothing really new – Rates are going higher.
– FED Funds is now pricing in a 78% chance of a 50 bps move
– Stocks ended mixed – but not a disaster.
– Janice Eberly – Remember this name.
– Try the Spaghetti Fini with Leeks and Pancetta
And JJ took the stage at Capitol Hill (again) and he reminded us that he is keeping his options ‘open’ (again). His comments reminded us that the FED is behind the ‘8 ball’ even after a years’ worth of rate increases……The Dow traded lower – (again) – losing 60 pts, but surprisingly – the S&P gained 6, the Nasdaq added 45, the Russell ended flat and the Transports gained 80 pts. Now this morning there has been a reconsideration of his comments and futures are all lower…..….….
On top of that we saw ADP employment come in stronger than expected…..at 242k new jobs (or as I like to say – RESTORED jobs), last month’s reading was also revised UP and the JOLTS Job Openings Survey ROSE by 300k more jobs than expected – coming in at 10,824k vs the expected 10,546k….but to be fair – even the higher number was lower than last months – upwardly ‘revised’ reading of 11,234k. This HOT eco data offering little to NO alternative for the FED chair to turn dovish anytime soon. And so stocks struggled to hold on….. even after JJ assured us that there has been NO decision yet on whether they go 25 or 50 bps on March 22, 2023 and he offered up hope that he (they) are not trying to force a recession……Now THAT’s funny! When did JJ become a comedian?
Listen – we are well beyond wondering whether or not we are going into a recession – we are past the point of ‘no return’ We are at that ‘sweet moment of surrender’ – and yes – we’ll hear the thunder roar and feel the lighting strike….And unlike the song – it won’t be pretty!!! And that song? Johnny Bristol’s 1974 hit – “Hang on in There Baby”. Every baby boomer knows this song and they know exactly where they were when they first heard it….Remind yourself and smile…… – here it is
In the end – Johnny tells us ‘Oh don’t fight it baby- Open up the door cause that’s the key to the freedom that we’ve both been working for……’ The door? Oh, that’s the 50 bp hike- that we are ‘almost’ sure is coming and the freedom is the complete destruction of inflation and getting back to some sense of normalcy…. See how I did that? LOL
On top of all this – there is the ongoing ‘anxiety’ about what the NFP report on Friday and the CPI and PPI reports due next week will reveal. …..Will they, like last month, surprise to the UPSIDE??? Or will the come in BELOW the expectations…..(not likely….) Expect investors and policymakers to scrutinize and dissect all of it…….In the NFP report they will be looking for 3 key indicators….What is the increase in payrolls….expectation of 225k jobs restored, Will we be surprised this month again? What are wages doing? Expectations of +0.3% m/m and +4.7% y/y – which is higher than last months read and of course we want to know what the unemployment rate is…. Currently it is 3.4% and the expectation is for no change…. NOT something that JJ wants to see….Capisce? We will need to see unemployment approach at least 5% before this is over……
Then next week its all about INFLATION….the CPI due out on Tuesday is expected to show m/m gains of 0.4%, ex food and energy of +0.4% while y/y gains are 6% and 5.4% respectively. PPI due on Wednesday calls for top line inflation at the producer level to be up 0.3% m/m, Ex food and energy of +0.4% and y/y reads of 5.4% and 5.4% respectively. All of these are ahead of the FOMC meeting the following Tuesday and Wednesday…..where the brain trust will debate and decide on what the next move will be.
Now remember when I told you that – at some point – I also expect that the FED will ‘re-define’ the inflation target to something higher than 2%. Well, guess what? Remember this name: Janice Eberly – the former Assistant Treasury Secretary for economic policy under Obama -she is now a finance professor at Northwestern Univ – Kellogg School….and she is the front runner to replace Lael Brainard in the number 2 spot at the FED. She is also someone who has ‘advocated for an inflation target HIGHER than 2%! Ladies and gentlemen – We have a winner!!! Ding, Ding, Ding….They will appoint her and then watch how the narrative changes….It’s all very orchestrated…..Who are they kidding?
As you might imagine – it was a mixed performance then for the sectors….Real Estate was the winner +1.4% while Energy was the loser – 1% – the other 9 sectors were + or – 0.5% on balance. Interestingly – the most strength for the year is in Tech +12%, Consumer Discretionary + 11% and Communications +13% while the biggest losers on the year are Utilities – 6.4%, Healthcare – 7% and Consumer Staples – 3%.
Utilities – I get – because you can now get 5+% in short duration Treasuries with no risk to principle – remember – utilities pay about 4% on avg in dividends so when treasuries were yielding zero – money moved to Utilities….but that is under fire now….because you can get 5% in boring but ultra-safe T-bills. Consumer Staples- well the thought is that if the recession hits – then their pricing power might fade – recall that all of them ramped up prices- multiple times – as inflation surged…. Will they continue to do that in a recession? Probably not, and while they aren’t going out of business, they aren’t ‘sexy’ like tech and communications….so if investors are looking for the biggest bang for their buck – they will gravitate towards sectors that were all overdone….so Tech, Consumer Discretionary and Communications top that list…..but will they hold up as rates rise and the economy declines? Probably not. And Healthcare? Well, it was all about guidance – but remember – demand for healthcare is inelastic so that will keep them inline – but these aren’t ‘sexy’ either.
Bond yields continued to move up…..the 2 yr. yielding 5.03%, the 5 yr. is yielding 4.32% and the 10 yr. is just below 4%. Shorter duration T-Bills – 3 months yielding 5.02% and 6 months yielding 5.27%. CD’s at the bank will now net you 5.25% – let that sink in….
And the dollar moved up……yesterday the dollar index ended the day at $105.66. This morning the dollar index is down 23 cts at $105.42 and that is giving a little life to commodities.
Gold fell by $37 on Tuesday to end the day at $1817 and held that level yesterday….. this morning – gold is trading up $5 at $1822/oz….and seems to have found support. The KEY level to watch is still $1800.
Oil is trading at $76.62 – down just 5 cts. from yesterday….It is all about the rates hikes and what that will do to the economy and the dollar strength…..Remember – I don’t think it’s a demand issue at all, I think it will be a stronger dollar that will put pressure on oil prices…Remember – oil demand is expected to GROW – OPEC estimates that demand will rise by 2.5% this year….or 2.3 million bpd – and that is taking an economic slowdown into account. $90 before $60.
US futures are churning….Dow down 20, the S&P’s down 10, the Nasdaq down 70 and the Russell down 4. ….NOT surprising after the performance yesterday…. FED Funds Futures are now pricing in a 78% chance of a 50 bps rate hike in 2 weeks – So tread lightly as the market reprices….because it will reprice. And all that means is there will be new opportunities.
European markets are all lower this morning…. down about 0.5% across the board…..
The S&P ended the day at 3992 up 5 pts….. but still below that 50 dma at 3997…and this mornings weakness might see us test 3940 if the narrative becomes anxious around tomorrow’s NFP report and next weeks CPI and PPI reports. As noted – the bets are rising that the Fed will push rates higher by 50 bps in 2 weeks….and in my mind that screams of desperation and mis-management – – and this is exactly what they did 40- yrs. ago….the lightened up and then were forced to become more aggressive as inflation remained sticky and stubborn.
Investing is dynamic – make the plan and stay the course but remain fluid to take advantage of the opportunities that are sure to come….…. don’t try and time it – Do your research and then invest accordingly,
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Spaghetti Fini w/Leeks & Pancetta
Simple to make and it presents beautifully….
For this you need: Butter, olive oil, 2 medium leeks, chopped – trim the bottom and the top off and then use the stalk, s&p, chopped fresh chives the Spaghetti, diced Pancetta, heavy cream and fresh grated Parmegiana Cheese.
Bring a pot of salted water to a rolling boil.
On medium heat melt the butter and a splash of oil in sauté pan. Add leeks and cook, stirring occasionally until softened, about 10 minutes. Add diced pancetta – sauté for 5 mins and then add in the heavy cream….Cover and keep warm.
Add the pasta to the water and cook until al dente – maybe 8 mins….Strain – always reserving a mugful of the water. Toss the pasta into the sauté pan with the leek sauce and stir to combine. If you need to add a bit of the water – do so now to keep it moist. Add chives, toss, and serve immediately. I always like fresh parmegiana with any pasta dish…so always have that at the table for your guests to enjoy.
Buon Appetito.
