Things you need to know.
– It’s FED week and Inflation week.
– 3 Central Banks to make policy decisions.
– Can the S&P and Nasdaq go higher still w/out any retreat?
– Oil is below $70 again – the Saudi’s are not happy.
– Try the Chicken Scallopini
Stocks ended the week mixed – with the S&P holding onto its recently minted BULL market status….trading was relatively quiet – there was no economic data to consider as investors/traders and algo’s remain in that ‘wait and see’ mode ahead of the CPI & PPI data this week that will help determine the FED’s next move…. In any event – the Dow ended the day up 44 pts or 0.15%, the S&P gained 5 pts or 0.1%, the Nasdaq rose 20 pts or 0.15%, while the Russell lost 15 pts or 0.8% and the Transports gave up 157 pts or 1.1%.
Now unless the inflation data is so different than the expectations – the bet is that the FED is ‘skipping’ any hike on Wednesday…. leaving the FED funds rate in the 5% – 5.25% range at this meeting. If the FED was having any change of heart – they would have leaked the news by now to either Goldman or the WSJ….(think over the weekend) and that did not happen – So, my gut tells me that they are positioned to do nothing….and then offer up some ongoing hawkish forward guidance so that NO ONE thinks they are about to pivot and cut rates…That is not happening…. The path of least resistance for rates is still UP – after that – it is a HOLD; the idea of a 2023 rate cut has now been put to bed as the futures markets are now pricing in a 1st qtr. 2024 timeframe for any cut at all – if there is a cut at all.
To be clear the CPI due tomorrow – is expected to show a mixed performance…. the top line m/m number is expected to rise by 0.2%, down from 0.4% while CPI Ex food and energy is expected to be +0.4% – which matches last month’s reading. So nothing really to see there, but the y/y numbers is what they will focus on…….and they are expected to show a more dramatic decline in inflation…..Top line CPI y/y is expected to be +4.1% down from +4.9% while the CPI ex food and energy is expected to also show a decent decline – ‘only’ rising 5.2% vs. last month’s 5.5%… If that is the case – then the inflation rate and the terminal rate will be equal and if the FED suspects that inflation remains in a downtrend, then we might just get a ‘hold’ on future FED moves…. but if inflation should do a 180 – expect rates to resume rising in July.
Now Wednesday brings us the all important PPI Index…and that is the price that producers have to pay for the raw materials they need to produce all this stuff that we buy……changes in this index typically take about 4 – 6 weeks to make their way through the system….so this is an important number as we consider where inflation is going in the months ahead. Top line m/m PPI is expected to be -0.1%, Ex food and energy of +0.2% which is the same as last month. Topline PPI y/y is expected to be 1.5% down from 2.3% while y/y PPI Ex food and energy is expected to be +2.9% down from 3.2% last month….and all of those numbers are good…..so just maybe – we are at or very near the top of the rate hiking cycle and if that is the case – then expect to see the recent push higher start to broaden out to those underperforming sectors. Think – Industrials, Finance, Healthcare and Basic Materials….
Utilities which are always a good bet for the divvy’s – could still come under some pressure as they compete directly with treasuries and or CD’s – and if those two instruments continue paying better than 4% with no equity risk – expect some investors to opt in for that! Utilities are down 5.8% ytd and typically pay somewhere between 3% – 4% divvy’s…. while short duration treasuries are paying better than 5% and the 2 yr. treasuries are paying 4.6%. 12-month CDs are paying 5%…So the competition is on.
An early morning announcement on Friday by GM helped to set the tone for trading. CEO Mary Barra is joining Ford Motor and announced that GM (like F) will begin using the TESLA Super charging stations starting in 2025 and that sent GM +1.1%, TSLA +4% and F +1.25%. TSLA has now set the standard for the industry – some will say that they are leading the race, I’d say – they are the race. The idea (anyway) that there was not ONE standard for EV charging stations (just as there is for gasoline stations) always seemed to be a bit curious….and now that two of the biggest US auto makers are partnering up with TSLA – maybe Joey should just give Lonnie the $7.5 billion to build out the EV charging infrastructure across the country – because we all know that Lonnie will do it correctly and under budget – but that’s another story… EV charging stocks as you can imagine – did not react well to the news…. CHPT lost 13%, EVGO lost 11% & BLNK gave up 10.5% – leaving investors in that space stunned.
Now – the S&P is up 12% ytd, and many investors keep asking – can this go on for much longer? Much of these gains are driven by the hype in ‘tech’ – specifically AI and everything attached to it. (It is essentially 7 stocks that are driving the action) The S&P is a market capitalization index – so it is driven by the biggest market cap names – which at the moment are all TECH names (think MSFT, NVDA, GOOG, META, AMZN, TSLA, and AAPL) ….…. But if we look at an equal weighted index across all 500 names – the S&P would only be up 2% ytd…. which begs the question – Can this continue? The very narrow leadership of the S&P is a concern for sure…..(again being driven by a handful of names) and if the FED for some reason continues to push rates up towards 6% then there will be re-allocation of money and the answer would be NO, but if the Fed signals that the rate hiking cycle is over – and the economy appears to have avoided a deep recession – then the answer is YES – investors will look for opportunities outside of ‘tech’ that will also benefit from a stable rate environment and that should lead to broader participation of sectors. And that might also mean that some investors take some money out of the biggest gainers and redeploy it into those underperforming sectors causing a re-balancing of risk. More on that in the days to come.
Oil is under pressure again this morning ahead of the FED meeting…. the media telling us that investors are being cautious as they wait for the FOMC announcement…. Yeah……not so much…. The price of oil has nothing to do with this week’s FED meeting – especially that the market is expecting the ‘skip’ this month. Although what you will hear is that as the Fed raises rates, it strengthens the dollar and that will put pressure on the commodity complex, which is true…but the FED is not raising rates on Wednesday and so that argument goes out the window. the dollar index is down 1.1% from the June high of 104.69 and today is trading at 103.30 and if the FED does nothing then the dollar should continue to retreat a bit…. which would help oil, but it is not….
The price of oil this morning once again has to do with concerns about China and the rising Russian supply. One day the published Chinese economic data is suggesting that the China recovery is not so strong…and that the world’s largest importer of oil may suddenly not be the largest importer of oil – something I absolutely do not agree with. In fact, the data shows that Russian exports to China (and India) are growing…. (And that suggests strong demand). With oil trading below $70 again – the Saudi’s (NOT OPEC) are once again talking up more cuts. In addition – Goldman cut its WTI price from $89/barrel to $80…
Gold on the other hand is trading right in line at $1979/oz as it too waits for the FED meeting…and while they are expected to announce a skip – the guidance will remain hawkish and that will keep a lid on gold for now…. Gold remains in the $1930/$2000 range.
US futures are higher at 6 am…. Dow futures are up 36, the S&Ps are up 11, the Nasdaq continues to push higher up 70 while the Russell is up 6 pts. It is a big week – as you know…. the eco data driving all of the action….as investors try to handicap what the FED will say vs. what they do. If JJ suggests that their recent actions are more successful than the market suspects and that inflation is responding appropriately – then we could see the rally broaden out as I suggested above…. If investors remain concerned that inflation – while lower – is not low enough and the FED hints at ongoing concerns about wages and consumer demand etc. Then further rate hikes would be expected and then we could see the market back off…….and remember – it is only a handful of names that have carried this market – so expect those to be the names that get hit first causing those sectors to retreat. Think Tech XLK + 33% ytd, Communications – XLC + 32% ytd, Semi’s – SOXX + 40% ytd and Consumer Discretionary XLY + 25% ytd.
European markets are up anywhere between 0.3% – 0.7%. Consumer products, Autos and Financials leading the way higher.
The S&P closed at 4298 – up 5 pts…. Last week I said that 4290 was in the crosshairs…. well, we kissed it, tested it and pierced it. This morning – it appears that investors remain hopeful that the FED won’t be overly hawkish. This week – will be an all tell….as we hear from 3 major central banks…. the US, the ECB and Japan…. Remember – these central banks are dependent on economic data – so prepare yourself for a variety of outcomes. The FED does nothing, the ECB rises and the BoJ – holds steady. In the end – remember – the fight against inflation is NOT over yet and it won’t be over until it is….The market is acting like the CPI will not push higher in the months ahead….which is where I will caution you…..There is still pressure on parts of the economy that could cause inflation to do a 180…..until we get that under control – I remain cautious, which doesn’t mean I am out of the market….in fact – quite the opposite….I’m just being a bit more cautious on where I allocate to. Keep your eyes on the VIX – right now it is at near historic lows…and that is also a problem – because it suggests too much complacency….at at time when the geo-political tension remains hot….
Stick to the plan, DCA (dollar cost average) into it. Build out the defensive part of your portfolio….do not keep chasing tech names that are way overdone… If you are nervous about a decline – position yourself with some of the contra trades that offer protection…. the SH, PSQ, DOG even the VIXY.
We are now in a new range….4290 which was resistance is now key – will it become support? We are about to find out…. If it holds and we remain above, it – it only strengthens the resolve of the bulls. The new trading range – if we remain above 4290 – has an upside target of 4600 which is August 2022 high. That represents a 7% move UP from here and is well above any year end estimates that range from 3900 – 4300…. ….. The near-term downside is the 50 dma trendline at 4150 which is a 3% move lower, which could happen in one day if we get hit with an event we are not expecting. In any event – a move to the long term 200 dma trendline, which is at 3975 – would represent a 7% move lower – something well within the normal trading band. And so, what that means is – Stick to the plan…and allocate according to your risk profile and time frame.
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 Scallopini
This is a simple dish, and you can serve it with sautéed peas and broccolini…. for this you need:
Flour, Chicken cutlets, Olive oil, butter, shallots, broccolini, fresh (or frozen) peas, white wine, lemon, and s&p.
Begin by seasoning the flour with s&p – now dredge the cutlets and set aside.
In a large sauté pan – add some olive oil and butter…. When nice and hot – add the cutlets and brown on both side – maybe 2 – 3 mins per side. Remove and set aside….
In the same pan – add the chopped shallots and the cut up broccolini and the peas. Sauté for about 3 – 4 mins…. Now add in about 1 cup of white wine, and the juice of one lemon – add back the chicken – reduce the heat to simmer – add in a bit more butter and reduce by half.
When serving – place a cutlet with the peas and broccolini. Serve with a tossed green salad of arugula, cherry tomatoes, sliced red onion and sliced cucumber. Dress in lemon juice and olive oil seasoned with oregano, s&p. Simple – yet fresh and delicious. Enjoy your favorite wine.
Buon Appetito
