Things you need to know. 

–         The PCE is due out at 8:30

–         3 Fed Members hint at a rate hike in May

–         Tech big wigs calling for more regulation around AI.

–         Joey calls for more regulation for mid-sized banks.

–         Oil – up again, Gold and Bonds holding their own

–         Try the Bucatini in a Roasted Red Pepper Sauce.

Good morning, it is month end and quarter end…Stocks continued to rise as asset managers went on a window dressing shopping spree ahead of the qtr. end marking period taking back many of the losses suffered earlier this month after getting whacked by the failure of SVB.  The Dow up 141 pts or 0.43%, the S&P ahead by 23 pts or 0.6%, the Nasdaq up 88 pts or 0.7%, the Russell lost 3 pts while the Transports added 58 pts or 0.4%.  As of this morning the Dow is the only index that is in red….but we do have today and with global markets all higher there is a shot that we could see the Dow go positive – but it would have to gain 245 pts to do so.

This as Richmond FED President Tommy Barkin told us that the FED can raise rates further if inflation persists, Boston’s Suzy Collins said that more tightening was needed saying ‘ While the banking system remains strong and resilient, recent developments will likely lead banks to take a somewhat more conservative outlook and tighten lending standards, thus contributing to slowing the economy and reducing inflationary pressures’.  Suzy also thinks that the FED can manage a soft landing… and that tighter credit conditions could remove the need for more rates hikes in the future……(oh boy….).  Then enter stage left – Minneapolis’s Neely Kashkari (who is a NON-VOTING member)  said the ‘he is committed to getting inflation back to 2%’ while it is still unclear what impact the financial – system turmoil will have.  And while he is committed  – remember, he does not have vote, but he is a mouthpiece…..

Look – Recession risk remains an issue….as the FED struggles to tighten policy while telling us that they can achieve that ‘soft landing’  – Something I think is ‘fake news’….We left a soft landing behind when the FED missed the opportunity to raise rates after the CPI blasted up and thru 2% back in April 2021….when we got the March 2021 data….recall – that they told us to mind our business – the recent surge higher was nothing to worry about – it was transitory – so we (the FED) will keep stimulating (zero rates and the purchases of billions of dollars of mortgage backed securities)  until we see inflation become completely embedded in our economy recreating history.  That history was the mid 70’s to early 80’s that saw the FED mismanage policy helping to send inflation soaring by 13% forcing then chair Paul Volker to jam rates up to 22% sending the US economy into a tailspin and a very ugly 2 yr. recession.  Money poured into the Treasury market and the bank CD market – I mean think about it – you were earning 22% GUARANTEED, NO RISK, SLEEP AT NIGHT…. vs. attempting to invest in stocks that were in a dark place – I mean, it’s tough to compete with 22% guaranteed.

And let me tell you, it was ugly….Unemployment shot up to 10%, housing got crushed, inflation ate away at the everyone’s pocketbook, people getting tossed out of work while college grads couldn’t find a job.  Then President Jimmy Carter got smushed in the election in 1980 – as we ushered in a new era with the election of President Ronald Reagan…….and the rest is history.

Now today there are a number of things happening –  The first is the PCE report – which is the FED’s favored inflation gauge and that comes out at 8:30 am.  It is expected to show inflation is running at +0.3% m/m and 5.1% y/y….both readings a down over last month – and that’s good.  If we look at the ‘core’ PCE – then we see m/m rising by 0.4% and y/y of 4.7%….again – a slight improvement vs. last month….and what they want you to focus on is the 4 handle in the core rate….so let’s see…..

The second ‘thing’ is the letter being signed by many tech big wigs over the future path of artificial intelligence…..Because that is going to be an issue (it already is and issue) and while they want to put the brakes on further development in order to ‘regulate’ the path forward – my guess is that it is already too late and even if the US imposes regulations – the rest of the world is not held to our standard – so what does that mean?  Does anyone think that China will slow its development? Is China going to abide by ANY regulation?    Come on….the fact is – It is too late for that. Are we going to let ourselves get further behind the 8 ball or not?  Now if you’re paying attention to what the market thinks – all you have to do is look at what those stocks have been doing…..BOTZ – which is the ‘Global Robotics & AI ETF’ is up 22% ytd…..and likely going higher…and a name that I like is C3.AI – the symbol AI – $27.63 up 6% yesterday.  They focus on developing, deploying and operating enterprise AI applications. – this stock is up 165% since January……and we are still at the beginning of this mega-trend.

The third is the fact that President Joey is calling on regulators to ‘tighten the rules for mid-sized banks after the failure of SVB…..which is comical – why?  Because there are plenty of regulations now….it was the REGULATORS that failed here…they didn’t enforce the current set of rules -never mind that the bank had no idea how to manage risk – especially risk in a rising rate environment.  How about trying to enforce the current set of rules first before you impose more onerous rules that will do nothing other than create more difficulty for those banks only adding to the dark clouds that are hanging over the sector.

Now, yesterday saw 10- of the 11 sectors rise….only the financial sector ended the day lower…..(think Joey’s recommendation).  Real Estate taking the lead – +1.3%, Tech + 1.2% while all the other sectors were up less than 1%.  The value trade and the growth trade (SPYV & SPYG) going neck and neck – up 0.5% as investors remain unsure about where to go….though – at the moment growth is leading up 7.6% ytd vs. value  +3.3%.  The VIX (fear index) has fallen back to ‘pre SVB’ levels and that suggests that investors remain complacent and that will allow for stocks to go higher….

Oil – guess what?  It’s higher again!  This morning oil is up 33 cts or 0.4% at $74.70 – it is now up more than 15% since the lows of last week….headlines suggest higher prices….Bloomberg runs with:

 ‘Oil Finds Favor as Supply Threatened and Banking Sector Fears Ease’

The supply threat is the gulf shutdown in Iraq at several oil fields in Kurdistan – putting pressure on prices.  Next is the ongoing demand story out of China and third were the industry reports showing a decline in US inventories suggesting demand is just fine….….We are about to kiss trendline resistance at $76….which I am sure will provide some short term pushback…seeing us retrace back to the low 70’s…..but as we move from winter to spring to summer – expect demand to remain strong and prices to rise.  

Gold is back at $2000/oz…..after retesting $1950 last week….the idea that the FED will be less aggressive is helping to support the strength we have seen because it will put downside pressure on the dollar index and that will help support the commodity complex.   It is consolidating around $2000 and the last time we traded here was in April 2022….which did prove to be a difficult level to pierce….as there was plenty of supply….Will we see the same this time?

And bonds – they continue to move lower – sending yields higher….the  2 yr. yielding  4.13%  while the 10 yr. is doing nothing – yielding 3.54%.  Shorter duration 3 month and 6-month bills are yielding an annualized 4.86% and 4.92%

This morning – US futures are mixed as the sun rises over NYC…..and we begin the final day of the month and qtr.  Dow futures + 78, S&P +6, the Nasdaq -12 and the Russell up 5. Now the weakness this morning in the Nasdaq is nothing to get worked up about…remember – it is end of qtr. – asset managers need to re-allocate money– so taking some money off the table in the outperformers and putting it to work in some of the underperformers that have gotten unnecessarily punished – is not uncommon.  And I think we will see money move into financials, healthcare and industrials – all sectors that are lower….but ripe for the pickings.

European stocks are also up – the UK + 0.2%, CAC 40 + 0.6%, DAX + 0.4%, EUROSTOXX + 0.4%, SPAIN + 0.3% and ITALY +0.4%.  Eurozone inflation reported today – showed that topline inflation is cooling – coming in at +6.9% down from 8.5% last month…..but when you strip it down – core inflation rose to 5.7% up from 5.6%.  German retail sales – lower while the UK economy grew by 0.1%.  At qtr. end – we see most of the European markets up double digits (12+%)  – the Italians taking the prize – up 14% ytd…..the UK – is the only one up single digits at +2.5%. 

And bonds – they continue to churn. 2 yr. yields at 4.09%, the 10 yr. did nothing ending the day at 3.56%…. while the shorter duration 3 month and 6-month bills are yielding an annualized 4.79% and 4.87% …. all offering shelter in the storm.

The S&P closed at 4050 up 54 pts…..well above what was trendline resistance at 4015 so that will act as support on a retest……Now if today’s PCE report is better (weaker) then look for stocks to continue to push higher…but if it comes in in line – then I think we just churn into the end of day.  It appears as if we want to test the February high at 4190. 

Now on a side note – the political drama unfolding across the US stage (and global stage) is the news that NY DA – Alvey Bragg has formerly indicted (with the blessing of the democratic party)  former President Donald Trump charging him with ‘allegedly’ paying a hooker $130k to keep her mouth shut during the 2016 election year… – and while this will most likely blow up in the end  – he has just ignited the fire underneath Trump supporters and non-Trump supporters – and while this event will not price stocks at all – it will provide lots entertainment and insight into the US legal system and the length to which the Democratic party will go to, to bring down a Presidential front runner during an election period. This will be the ‘Watergate’ of the 21st century.  Now for those of you that don’t understand the reference – GTS – Google that Sh*t.

Have a great weekend.

Chief Market Strategist
kpolcari@slatestone.com

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Bucatini with Roasted Sweet Red Pepper Sauce.

You can make the sauce in the time it takes to boil the Bucatini….10 mins.

For this you need – Bucatini (a kind of spaghetti), diced onion, chopped garlic, olive oil, Roasted Sweet Red Peppers, Tomato paste, chicken broth and s&p, fresh basil.

Bring a pot of salted water to a rolling boil – add the Bucatini

Now – in a pot – heat the oil, and sauté the onion until soft and tender – it may take on that golden delicious color…..Add the garlic – do not let the garlic burn!

Next – put the Onions & garlic in the food processor, add the chicken broth, tomato paste, and sweet red peppers,  – Blend.  – season with s&p and put back in a lg sauté pan to keep warm – on simmer……

When the bucatini is done – strain – always reserving a mugful of water -.  Using tongs – put the bucatini into the sauté pan with the sauce…. stir to mx well. If it absorbs all the sauce – add back some of the ‘tears of the Gods’ (the pasta water) and allow to absorb.  

Serve in warmed bowls – to make this different – top with crumbled pieces of goat cheese (vs. grated parmegiana).