Things you need to know.
– More FED speak – All calling for higher rates.
– DXY declines as the top of the cycle is close.
– Commodities rise – oil and gold are UP.
– Allocate to the underperformers in a defensive play.
– Try the Grilled Rib-Eye w/Arugula and Grana Padano
Stocks kicked off the week on a stronger note even though there was lots of FED commentary highlighting the need for higher rates in order to bring inflation down to and closer to the 2% target rate…. Mary Daly – you remember her, right? She is the San Francisco FED President and a voting member of the FOMC – the one that fell down when it came to regulating banks in her region – recall Silicon Valley Bank. She came out of hiding and told investors that ‘we are likely to need a couple more rate hikes over the course of the year’. She was joined by non-voting member, but very vocal Cleveland Fed President Loretta Mester – who has been calling for a 6% terminal rate for months now…all while the market had been pricing in a 4.75% rate initially before recognizing that maybe the terminal rate needed to be more like 5.25%… and now that looks like that isn’t enough…. Mester telling investors that ‘In order to ensure that inflation is on a sustainable and timely path back to 2%, …. the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving.’
Then FED Vice Chair Mikey Barr spoke about a plan to require more capital on hand for the largest US banks……warning us that we need to be ‘skeptical about the ability of bank managers and regulators to anticipate ALL emerging risks’…. again, think about what happened to a handful of the super-regional banks that imploded this spring. Now, not to sound the alarm – our largest US banks are in great shape and the most recent stress tests proved that…. But what it does suggest is that regulators may be concerned about potential hidden risks as we move thru this economic cycle…. think commercial real estate loans……
By the end of the day – the Dow gained 210 pts or 0.6%, the S&P added 11 pt so r0.25%, the Nasdaq gained 25 pts or 0.2%, the Russell surged – adding 31 pts or 1.6% while the Transports added 160 pts or 1%.
There wasn’t any real eco data to drive the action yesterday and there isn’t any today either……and that left investors to focus on the data due out tomorrow and Thursday and then the kickoff of earnings season on Friday. The big numbers this week are the latest inflation reports for June. The CPI – due out tomorrow at 8:30 am is expected to show that the ‘core’ inflation rate remains at 5% y/y….a good 3 percentage points more than the target and that will be the ongoing issue for JJ Powell. Now, CPI on the top line m/m is expected to rise to +0.3% up from +0.1% last month (not good) …. While ‘core’ CPI m/m is expected to show a slight decline – coming in at +0.3% down from +0.4%. (And this is what they will focus on…. this slight decline in the core rate m, /m). Remember while the CPI is trending lower – it does not mean that prices are in decline, all it means is that prices are increasing at a slower pace – but they are still increasing. We are also going to get Avg Hourly Earnings y/y and Average Weekly Earnings y/y – what will those reports show? And then at 2 pm – the FED will release their beige book – which details the state of the economy in the 12 Federal Reserve regions of the country. While this is interesting – it is not really a market mover at all.
Then Thursday – brings us the June PPI report – which is what prices are doing at the producer level…. which ultimately make their way to the consumer level. PPI on the top line m/m is expected to show an increase of +0.2% up from last month’s read of -0.3%, core rate (ex-food and energy) of +0.1% vs. last month’s 0%. Y/y PPI is expected to be +0.4% while the core rate (ex-food and energy) is +2.6%. – Both better numbers than last month. Earnings include FL, PEP, PGR and FAST.
And then Friday brings us the U of Mich data points…. Sentiment of 65.5, 1 yr. inflation expectation so of 3.1% while the 5 – 10 yr. inflation expectations remain at 3%. But it is also the official start of earnings season….and we look for earnings from JPM , BLK, UNH, STT, C, & WFC. I say official – because JPM is the first DOW stock to report….and that is considered the official start of the race.
2nd QTR earnings are expected to decline by 7.2% (according to FactSet)- but we all know that is not always the case…. earnings end up surprising (mostly to the upside due to all the downward revisions) and I expect the same this reporting season as well. So far – we have heard from 18 S&P companies – with 14 of them ‘surprising to the upside’ (that’s 77%) while 12 of them reported a revenue surprise – (that’s 64%). As of this morning – the S&P is trading at 19.6 x’s forward earnings ($224) …. leaving it above the long term 10 yr. average of 17.4%. and with the terminal rate now expected to hit 6% and stay there – investors will most likely have to reprice risk…. if it appears as if that earnings number is too high. We are about to find out.
AMZN kicks off AMZN Prime day (today)….which is usually the biggest shopping day of the year (for AMZN)…..expect all kinds of discounts in order to get consumers to spend their money…and then expect – the media to tell us how strong the consumer is….suggesting that the economy is strong as well….something I would debate as not true….but it is what it is……If AMZN succeeds in getting you to spend your money – then I guess you are not feeling the pinch…..and then the media would be correct – in any event the stock is quoted up 60 cts in the pre-mkt at $127.70/$127.80
Oil is trading at $73.25/barrel – up 9% in the last 2 weeks…. Recall last week I said that we are now in the $71.30/$73.60 trading range…. A test of $73.60 (trendline resistance) will prove to be tough to get through unless OPEC gets even more aggressive with production cuts. Remember – they want to see oil at $80 + barrel. And guess what – the Saudi’s and The Russians are due to cut production again in August (the Saudi’s cut on July 1st) and that is causing a bit of concern over supplies – all while demand remains strong….We have now tested that resistance trendline over the past 3 days…..and this morning we remain just below it…..In addition – we have seen the dollar index fall nearly 2% in the past week and that is also helping oil and other commodities move up……Recall the inverse relationship between the dollar and commodities. I continue to believe that the Saudi’s will get oil back to the key $80 level that they need to support their lifestyle.
Gold – another commodity – traded down to the long-term support trendline at $1900 and held – something I expected. It has now bounced off of the at level and is trading at $1945/oz – up 2.5% over the past 10 days….as the dollar has weakened. We remain in the $1900/$1975 trading range.
And the dollar index is slipping because the FED has signaled that while we aren’t there yet – we are much closer to the top of the hiking cycle and that is causing currency traders to sell the dollar…. the dollar index is now below all 3 trendlines but appears to be holding the April/May lows of 101 leaving it in the 101/103 trading range.
And US treasuries? Yields are UP…. the 3- & 6-month bills yielding 5.45% and 5.5% respectively while the 2 yr. is now yielding 4.8% and the 10 yr. is kissing 4%. 12-month bank CD rates are approaching 5.3%….and these will prove to be a bit of a headwind for stocks as investors look for less volatility and more stability in the months ahead.
And US futures are struggling to move up…. Dow futures +9 pts, the S&P’s +5, the Nasdaq +20 and the Russell is +5. Investors trying to decipher all of the most recent FED statements……and warnings of higher for longer rate levels. Look – investors are pricing in a soft landing…. something that I don’t see…. although, I no longer see a crash landing either…. I do see a ‘softer’ landing – which is different from a soft landing and a crash landing. Remember the risk of a recession has not gone away….so I expect the developed markets to run into choppy waters over the next 3 months or so……which should bring valuations down a bit….and more in line with longer term valuations….and all that means is that we could see the S&P trade down the 4000/4100 range before this is over and that would be a 6 – 9% move – which is well within the normal range.
The next hurdle for the markets will be the start of earnings season…and that begins officially on July 14th…. Expect all kinds of pre-announcements and analyst revisions in the days ahead.
The S&P ended the day at 4409 – up 11 pts. Last week I said Do not be surprised to see a pullback ahead of the start of earnings…I continue to believe that is true…and as such I continue to put more money into those defensive sectors that performed well yesterday…. Industrials – XLI + 1.4%, Healthcare – XLV + 0.8%, Financials – XLF + 0.5%, Energy – XLE + 0.8%, The SMID (Small and mid-caps) IJJ and IJT were both up 1.2% and 1.4% respectively. The Value trade – SPYV +0.5% while the Growth trade – SPYG was flat.
In the end – Stick to the plan…Do not make emotional decisions. Call me to discuss.
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.”
Grilled Rib Eye w/Arugula & Grana Padano
There are only a couple of ingredients…. a nice Rib-Eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano. This dish is about simplicity….
Just FYI – Grana Padano – is one of the most popular cheeses in Italy. It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.
Season the Rib-eye with s&p and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.
Heat your grill – Place the Rib-eye on the grill and sear for 4 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – –
Next – allow it to rest for 3 mins and then carefully slice it on a diagonal to make it look pretty.
When serving – Place on a warmed plates and cover with fresh arugula & chopped red onion – that has been seasoned with s&p, dried oregano, olive oil and a squirt of fresh lemon juice – To finish – dress this with razor thin slices of the Grana Padano. Serve immediately with a house Chianti.
Buon Appetito
