Things you need to know.
– PPI weaker, FED skips – but remains hawkish…
– Stocks confused – ending the day mixed – futures this morning are weaker.
– Oil – fall below $70 again…. stockpile build and concerns about Chinese demand (again)
– Gold lower on the prospect of higher rates ahead
– Try the Pork Cutlet Milanese
And the results are in……PPI continues to decline – much like the CPI and the FED ‘skipped’ on a rate hike….and if THAT surprised you – then come out from under the rock you been living under…..Look – it wasn’t a secret by any stretch – and that was on purpose….as the FED does not like to ‘surprise’ anyone on what the ‘next’ move will be, they like to prepare the markets well in advance for what the move is going to be – and if they had changed their minds prior to the announcement – trust me – they would have ‘leaked’ that out as well. ….….and investors/traders and algo’s loved it – at least they did in the morning…. They didn’t so much after the FOMC announcement hit the tape and we prepared for JJ to take the stage. As 2:30 came around – stocks did a 180 – reversing course to head lower…. when JJ started to speak is when we got a surprise …. in the ‘guidance’ going forward. The Dow was down 400 pts, the S&P’s down 12, the Nasdaq was lower by 85 pts, the Russell lower by 22 while the Transports rose 140 pts….and then we listened and listened and listened some more…. There were essentially two takeaways….
1. Not one FOMC voting member sees any rate CUTS in 2023 – now as you know that is contrary to what some in the market had been pricing in and so THEY were disappointed.
2. There are more hikes coming…. he suggested maybe 2 – but he was clear…that this ‘skip’ was not a pause.
He went onto say that the ‘projections’ by the members showed that 12 of the 18 or 67% of them expect to raise rates to between 5.5%-5.75% (or higher!) unless the economy starts underperforming. Of the other six – four of them expect one more hike while the other two – thinks a hold here is appropriate….
I thought that yesterday’s weaker PPI report suggests that next month’s CPI report will be lower as well….…and by those numbers – It’s hard to see why then need to increase again…. but let’s be honest…. Have you seen a decline in prices? I mean a decline in the ‘everyday prices’ that affects you every day? Food? Utilities? Energy? Services? Dining Out? Have you? You have not!
And what about healthcare? Did you see UNH yesterday? It fell 10% on the opening only to end the day down 6.6% after they warned of the coming rising healthcare costs and what that means to the bottom line…. (It’s not good) And so where are all those declines? It’s all smoke and mirrors! And it’s all about the way they tell you the story. Let’s start by saying that the two inflation reports are not suggesting that prices are FALLING…. they are not…. prices are still rising – only at a SLOWER pace…..Capisce? So, on Wednesday – we learned that the CPI – ex food and energy y/y rose by 5.3% – yes down from 5.5% last month or down from 9% last year BUT they are still going UP…and that is why you aren’t ‘feeling it’.
And so, markets thrashed around….as the FED signaled ‘optionality’…. right? They left the door open to hikes, but he also made it clear that they would pause IF we see a significant slowdown…..It’s all about options…and JJ did not want to paint himself into a corner…..and remember – Loretta Mester – Cleveland Fed President is the one who said she saw 6% as the terminal rate months ago……and if we get two more hikes – we will be just about kissing that level.
I was on with Neil Cavuto yesterday – at 4:30 pm on Fox’s Your World – here is what I had to say.
https://www.foxnews.com/video/6329447404112
Ok – by the end of the day – we had a mixed performance in the markets…The Dow lost 235 pts or 0.7%, the S&Ps added 3 pts or 0.1%, the Nasdaq up 53 pts or 0.4%, the Russell lost 23 pts or 1.2% while the Transports gained 195 pts or 1.4%.
Expect to hear more and more about this all day – as the media tries to dissect and digest the presser. Many asked – What did he mean when he said.
“We don’t know the full extent of the consequences of the banking turmoil that we’ve seen” or
“It will be appropriate to cut rates at such time as inflation is coming down really significantly, and again we’re talking about a couple of years!”
Banking turmoil? Isn’t’ that over? Or is there some more smoke brewing….? Is he warning us about a coming CRE (Commercial Real Estate) crisis? Adjustable rate HELOC’s, Ongoing wage declines? Oh right – we didn’t talk about that – wages are falling (or rising less rapidly than inflation) – which means they are falling – and that is another reason why Joe Q Public isn’t feeling the love…. Is he suggesting that we’ve got 2 more years of falling wages?
Inflation coming down significantly? Wait – everyone in the Biden administration along with the DNC – keeps telling us that it’s ‘plunging’… is that an untruth? (I think it is – I just explained that above) And what’s with ‘a couple of years?’ That doesn’t sound good….I mean – a couple more years of THIS? Oh boy!
In any event all of the week’s US inflation/FED drama is over and now we’ll hear from China, the ECB and the BoJ….
Overnight China reported that Industrial Production was lower – but that was the consensus, Retail sales were a bit underwhelming leaving local investors to worry about further slowing…. all while the PBoC (People’s Bank of China) cut rates as a way to stimulate their economy and support the real estate market. Speculation is running high that more cuts are coming.
And we are about to hear from the ECB this morning….and they are expected to RAISE rates by 25 bps taking their terminal rate to 3.5%…. – which is still 3% below the current inflation rate of 6.5%.
This morning US futures are lower…. Dow futures – 55, S&P’s down 15, The Nasdaq down 103 pts and the Russell is down 8. Expect the media to now focus on the next 6 weeks – until the next FOMC meeting – as they ponder what the cumulative effects of all of this tightening will have on the economy and on monetary policy. The market is now split on the next FED move…. skip again or hike? Remember CUTS were taken OFF the table…so that is not an option in this poll.
Eco data today does include Retail Sales m/m of -0.2%, Ex autos and gas of +0.2%, Import and Export Prices (non-event), Initial Jobless Claims of 245k, Cont. Claims of 1.768 mil, the Empire Manufacturing Survey of -15.1, Philly Fed outlook of -14, Industrial Production of +0.1%, Capacity Utilization of 79.7%. (Remember – as we approach 80+ then inflationary pressures start to build again).
Oil – gave back the $70 handle – as it traded down to a low of $68.07 before settling in at $68.27. The EIA reported that domestic crude stockpiles rose by an unexpected 7.9 million barrels…. toss in the idea that the FED is not done raising rates and that only added to the selling. Remember – as the FED raises rates – the dollar becomes a more attractive investment – thus investor will push it higher and that will negatively impact the commodity complex – think oil and precious metals…. Investors awaiting the latest ECB announcement are also weighing on sentiment. Today’s weaker Chinese eco data is not helping the demand story – but the idea that the PBoC cut rates to stimulate demand in their economy is causing oil to find a small bid. Again – Prince MBS (Saudi Prince) is not happy about $68 oil…it doesn’t fit their narrative and it doesn’t do anything to support their economy…they need $80 minimum….to keep up with the Jones’s!
And that speaks to Gold’s weakness…. This morning the bears are out with a vengeance…. down $23 – leaving gold trading at $1,945/oz. This now puts us below the trendline that gold has been trying to hold… ($1,975)- leaving it solidly in the $1,890/$1,975 range…. (Long term trendline support/and trendline resistance)
Treasuries – remain inverted – but what does that really tell you? Apparently not much, because 17 months ago when it inverted – everyone raised the roof -saying that a recession was imminent…and that we need to batten down the hatches….Since then we’ve seen the S&P plunge by 22% only to take most of it back….rising 25% off that October 2022 low….and the Nasdaq! It plunged by 33% in October 2022 and has now regained 35% as of yesterday…..both still a bit lower than that February high, but not anywhere near what it would be trading at if we were in a full blown recession…..Remember to be flat with the February highs – the S&P would have to advance by 31% while the Nasdaq would need to advance by 44%.
And that is the question now that we know what the FED has in store….currently – the S&P is trading at 19.5 x’s forward earnings ($224/sh)….and if the FED pushes higher – then valuations will have to be adjusted (down), EPS for the S&P will be adjusted down and that just means prices will adjust (down). Now that doesn’t mean a crash at all…so don’t get your panties in a bunch…it just means some names will go on sale….and would you like to venture a guess on what sectors that might be? Maybe the sectors that have WAY outperformed? Just sayin’.
This morning – the 2 yr. treasury is yielding 4.6%, the 10 yr. 3.8%, the shorter duration bills – 3 and 6 months are yielding 5.1% and 5.3% and those are attractive yields especially if you think stocks will plunge.
European markets are lower – as they digest the FED’s move and await the ECB move…. The Chinese data is also weighing on the tone….at 7:30 European markets all down by about 0.7%.
The S&P closed at 4372 – up 3 pts…. This morning the tone suggests a pull back – a move that I have been telling you to expect…. but will the pullback be more than just 6 hrs.? Will this be the moment where we see some consolidation in the indexes – considering the parabolic move higher….think Nasdaq…..that is the most vulnerable to profit taking as it up 30%….But I think, money that comes out of that sector will find a place in those underperforming sectors that we have been discussing…..Industrials, Financials, Staples, Healthcare, SMIDS and even the Regional banks…..which are up 24% off the May low….
A pullback to 4250 ish would not be out of the question….and a pullback to the trendline at 4160 would also not be out of the question and it would only be a 4% pullback.
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.
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.”
Pork Cutlet Milanese
Love this dish…
You start by making the Tomato Bruschetta – get some nice ripe plum tomatoes – maybe 7 or 8…….dice and add to a glass bowl…..3 or 4 cloves of garlic….now crush two of them and then slice the other two – add to bowl…..fresh basil – chopped, s&p, olive oil and diced red onion……(I love red onions so the more the merrier – but you figure it out…) – cover and let marinate…do not refrigerate….
Next the Pork Cutlets – Pound thin then Rinse and pat dry. Beat a couple of eggs and set aside. Prepare a bowl with Italian seasoned homemade breadcrumbs – set aside. Prepare a bowl with flour – set aside. Make the assembly line – Flour, Egg wash then breadcrumbs.
Pour some olive oil in a broiling pan and turn broiler on high. You want enough so that you cover the bottom of the pan – but you do not want the cutlets bathing in oil……place the rack on the second level below the broiler.
Dredge the cutlet in the flour then dip in the egg wash and then dredge in the homemade breadcrumbs making sure to coat well on all sides. When the oil is hot – place the cutlet in the broiler pan and turn over so that the seared breadcrumbs are now under the broiler. Cook for about 5 mins or until it is a nice golden brown. Flip the cutlet and broil the other side – another 4 / 5 mins or so. Remove.
Now the presentation…. You need to make a bed of greens on the plate – maybe fresh spinach, or arugula, or Boston bib – you can mix or use just one…. Next place the broiled cutlet on top in the middle – looks good, no?
Now – using a spoon – add the bruschetta on top of the cutlets – this is a colorful dish…you have the green from the greens and you have the red from the tomatoes…. It is like eye candy…….
Serve with a red wine of your choosing…. I like a Chianti Classico with dish – but you can choose whatever makes you happy.
Buon Appetito
