Things you need to know.
– Markets await this week’s inflation data.
– The debt ceiling negotiations kick off in earnest.
– Treasury yields rise, Oil rises and gold rises….
– CA – is the first state to ‘default’ on $18.5 billion of debt – but Gavin is travelling the country…Telling us how to manage our states!
– Try the Spin on Chicken Scarapiello
Stocks started the week a bit mixed…as investors and markets await KEY economic data this week……Regional banks which started out strong after having been beaten up last week – ended up giving up those early gains. PACW (PacWest) which was under severe pressure last week announced a dividend CUT and that gave an early push to the stock (+30%) as investors are betting that the cut in the dividend raises its odds of survival. PACW lost much of those gains but did end the day up 3.7% but that was not true of the broader group…the KBW regional banking index lost 2.8% on the day and the KRE – S&P Regional Bank Index lost 2%…. ….as the nervousness continues.
On Friday – JPM put out a note that said due to the recent volatility – the regional banks were a ‘screaming’ buy (my words not exactly theirs – but it is essentially the same thing). On Friday they did rally nicely but yesterday – concerns over what this weeks eco data will say along with the nervousness over the lending environment and the possibility of a longer and deeper recession gave investors a reason to be cautious. In the end – analysts are concerned that the primary risk is that small and mid-sized sized businesses will lose borrowing power due to the ongoing turmoil in the banking sector that will (and is) resulting in tighter lending standards on top of everything else.
In fact – the FED put out an opinion survey of senior loan officers yesterday and guess what it revealed? YUP…Credit conditions are ‘deteriorating’. Last time I checked – ‘deteriorating’ was not seen as a positive word in any context….so the algo’s did a 180 and sold them off. Chicago FED President Austy Goolsbee told Yahoo Finance that he’s ‘getting vibes’ of the beginning of a credit squeeze. Think about that – ‘vibes of a credit squeeze’….
At the end of the day – the Dow lost 56 pts, the S&P gained 2, the Nasdaq added 21pts (putting it now in a new bull market – it is up 20% off the December low), the Russell lost 6 pts while the Transports bot smushed – down 108 pts or 0.8%.
Eco data this week is all about both the CPI and the PPI – tomorrow at 8:30 we are going to the latest CPI, and it is expected to show a m/m gain of +0.4% – which is UP from 0.1% (I think I suggested that this was going to happen – didn’t I?) Y/y is expected to be flat at +5% (sticky). And if you take out Food and Energy – m/m is expected to be +0.3% while y/y is expected to come in at +5.5% – both slightly lower than last month (0.1% lower) – but that’s after you take out everything we need! Food and Energy!
And so, here is the issue – what will that cause the FED to say and do now? Recall that Friday’s NFP report was stronger and wages were higher….and that is not what the FED wanted to see, so if the CPI suggests that inflation is now at the ‘sticky’ point and is not continuing to subside – then I would suggest that we are going to see one more hike in June and that will get us to 5.25% – 5.5% – right where the inflation figures remain stuck. Remember – many economists and analysts have said that the FED has to get the terminal rate ABOVE the inflation rate….and so that is why it makes sense to me. At the point – we will at least be AT the level of inflation – not above but more importantly not below.
Then Thursday brings us the PPI – which is the producer price index – a report that reveals what producers are paying for the raw material they need to produce. Now if you remember that stunning negative print last month – PPI final demand fell by 0.5% (a stunner) – well that is not supposed to be the case this month…PPI on the top line is expected to be up 0.3% (a 0.8% swing) while PPI final demand y/y is expected to be +2.5%. Once again if you take out food and energy – PPI is expected to be up 0.2% m/m (vs the negative 0.1% print last month) and +3.3% y/y….
In any event – unless these numbers veer so far from the expectation – my guess is that it means nothing for any change in what I expect the policy to be. One more hike and then a pause…. (Not a pivot).
Of the 11 broad S&P sectors – 7 were lower – not significantly but lower – Industrials, Utilities, Tech, Consumer Staples, Healthcare, Basic Materials and Real Estate, Energy was flat while Financials, Consumer Discretionary, and Communications were all higher…. Communications were the strongest – up 1% on the day.
Away from that we saw strength in Homebuilders, Retail (think discretionary spending), Semi’s, Metals and Miners, Cybersecurity had a nice day +1.7%, Coal stocks were strong up more than 1%, and AI saw buyers taking that name up 2.8% on the day. The Value of Trade (SPYV) was flat – leaving it up 5% ytd, while the Growth Trade (SPYG) was higher by 0.1% leaving that trade up 10.7% ytd and that makes sense if you look at the Nasdaq +18% ytd. (When you think of growth stocks you think of Nasdaq).
Oil – which had been under pressure for 2 weeks – rallied hard on Friday – rising 4% (think strong NFP report and lots of short covering) and continued on that path yesterday…. rising by 2.5% to end the day at $73.12 – this as all of those ‘demand destruction’ and recession stories faded, and the ‘short’s’ ran for cover. Many trader types that sold oil down the past two weeks – had an epiphany over the weekend – realizing that maybe the sell off was just a ‘bit overdone’ and so the move higher continued. OPEC’s latest monthly oil demand/supply report is due out on Thursday and the voluntary cuts that they announced the last time oil pierced $70/barrel begin this month…. Their next meeting in on June 4th….and if oil remains sub $75 – then expect to hear them beat the drums about more possible cuts.
Gold this morning is up $6 at $2040/oz…. last week it rallied by 4% before backing off…. all amid concerns over the global economy, the regional banking ‘issues’ and the now front and center debt ceiling standoff. It remains 2% higher than the lows earlier this month…and if all of those concerns (regional banks, Debt Ceiling and Recession) remain on center stage then expect that will trigger another move up in gold – think ‘safe haven asset’. If the sh*t hits the fan – investors will look for safety in gold and US treasuries – Period.
Treasuries yields are all up…. the 3 month is yielding 5.23%, the 6 month is yielding 5.08%, while the 2 yr. and 10 yr. are yielding 3.97% and 3.48% respectively.
The VIX – Fear Index – which shot higher last week has retreated just a bit….and is trading at $17.65…. Leaving it closer to the recent low suggesting more complacency…. which I think is a danger. Look – anxiety is building – which does not mean we are going to crash – it just means remain cautions… The banking sector turmoil is not over, they are going to make dramatic headlines about the debt ceiling – and in fact Treasury Secretary Yellen told us yesterday that a failure to raise it will be a ‘catastrophe’……Come on, stop the histrionics…..they will raise it – we all know it, but any of the turmoil created by all of this will present opportunities for the long term investor.
In the end – the economic tone remains more negative…concerns rising over what the next FED move will be and what the economic data will tell us. California is now the first state to ‘default’ on $18.5 billion of debt –
but Governor Gavin Newsome is travelling the country – telling us all how to run our states as he clearly is gunning for Joey’s job….My bet is that neither Biden or Trump will be the ticket names by November 2024…..the DNC will take Biden out at the convention (due to cognitive issues) – when it’s too late to showcase anyone else and put Gavin in while the RNC candidate is not yet showing himself/herself. I think the country is tiring of 80 yr. old leaders and is looking for fresh names and faces with fresh ideas….and that too will cause noise in the markets – but until that happens you can’t handicap it….so stick to the plan. Build a defensive portfolio….
US futures are down…Dow down 140 pts, the S&P down 18, the Nasdaq lower by 65 and the Russell is down by 8 pts.
European markets are also a bit lower…France in the lead – down 1% while the others are down between 0.5% – 0.8%.
The S&P closed at 4138 down 56 pts…. ….…. I’ve been saying that it feels tired to me…and that the recent high of 4165 ish felt toppy and I continue to believe that….the 50 dma is now at 4045 and a test of that would not be a surprise….Investors will have to decide – today starts the WH meeting of both sides to discuss the debt ceiling…and both sides have to WIN something….Jo Jo has to appear as if he did not give up anything, while Kevin McCarthy needs to show that he got something… In any case – grab the popcorn…. The show is about to begin.
As a long-term investor – stick to the plan, build a more defensive portfolio to help weather the storm…. Use short duration treasuries as a holding place for cash – until you get ready to deploy it while using the contra trades to help protect you in a downdraft….…. In the end – broader market weakness – presents an opportunity in the big mega cap names across the sectors…. for the long-term investor.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Chicken Scarpariello
Chicken/Sausage/Sweet Vinegar Peppers – a bit of a take on the traditional Scarpariello dish – (you can use hot cherry peppers if you prefer – I cannot)
You will need: Thighs & legs, (bone in/skin on), s&p, olive oil, sweet Italian sausage, vinegar peppers, garlic, white wine, chicken broth, marinated artichoke hearts, thin sliced potatoes, s&p and flour. Total time: 1 hour, start to finish.
Preheat oven to 375 degrees – Preheat grill for cooking the sausages.
Season chicken pieces with s&p – heat up oil in frying pan – when hot – reduce heat to med/hi – now add chicken and brown on all sides – maybe 10 minutes total. While this is cooking – place the sliced potatoes in the baking dish – season with s&p – add a splash of oil. Now remove the chicken from the frying pan and place it in the baking dish and put in the oven and continue to cook for about 30 minutes.
Next – cook the sausage on the grill – careful not to burn… maybe like 10 minutes total… remove from grill and let rest for three or four minutes then cut into bite size pieces. In the meantime – add the chopped garlic to frying pan (that still has the juices and oil from chicken) along with sliced vinegar peppers – sauté. Now add the sausage and some white wine and reduce (five minutes) – next add chicken broth and the artichoke hearts… sauté for another five to eight minutes…
In a separate bowl – whisk together some flour and milk (you can use water) and add to the frying pan – allowing it to cook and thicken a bit… do not let it get too thick – you can add a bit of broth if you need to. Re-introduce the chicken/potatoes to the frying pan and allow to simmer for two or three more minutes.
Now serve on a large, warmed platter family style. Accompany with a large mixed salad dressed in a balsamic vinaigrette dressing. Enjoy your favorite chilled white wine –
Buon Appetito
