Things you need to know.
– PPI hotter than expected and that sent bond yields up.
– Can producers continue to pass on higher costs to consumers?
– The dollar holds steady, gold holds steady and oil declines just a bit – why? A weakening China…. LOL
– 9 Days til the GOP Debate and 10 days til the start of Jackson Hole
– Try the Sea Scallops w/Tomato Bruschetta
Friday brought us the latest PPI report showing what inflation is doing at the Producer level…….and what we found out is that it is rising….Not surging, not exploding – but it is HOTTER than the expectation…..And that is a problem……or it’s going to become a problem unless the FED decides to maintain the course…..(think remain hawkish) which is what I think is going to happen,,,
Now there are plenty that think they are done raising rates and that they are prepared to pause and let the most recent hikes run their course but Friday’s PPI data just may make them change their minds….We will get further confirmation of that at month end when we get the FED’s favored inflation data point the PCE – What will it show? And then we get the August CPI and PPI inflation data in mid-September – data that will reflect the recent surge in oil and energy prices……a data point that the most recent CPI an PPI data did NOT capture…..And those increases in energy prices are sure to show up in the August numbers. Remember – higher oil prices lead to higher gas prices (Gas is up nearly 34% by me….2 months ago I was paying $3.29/gal – last week I paid $4.39/gal for REGULAR), and higher gas prices lead to higher transportation costs and higher transportation costs lead to higher food costs…. So, when food producers pay more to move the food – guess who ends up paying? Bingo! You and me. And that data will surely show up in the coming PCE, CPI and PPI reports later this month and next.
The question on everyone’s mind is – Will businesses continue to pass on higher wholesale costs in order to preserve their profit margins and if they do, what will consumers do? Are American’s finally tiring of rising prices and the struggle to keep up and what role will that play at the FED?
At 10 am – we heard from the U of Michigan and while nothing was out of line, it should be noted that respondents now think that 1 yr. inflation will come in at 3.3% – down from 3.4% and the 5 – 10 yr. rate will be 2.9% down from 3%…again – a data point that I think is useless…
But in the end – it was the PPI Report that once again ignited the conversation about what the FED will do next…and that sent tech lower – Nasdaq down 94 pts or 0.7%, as investors fled the ‘sexy’ names, the S&P down 5 pts and Transports lower by 34 pts – We saw money move into the big, boring Industrial names – Dow up 105 pts. along with the SMID (Small and Mid-caps) – the Russell gaining 2.and half pts.
It appears clear that the market and investors are tired as we are near the end of earnings season, and investors need to digest the surge higher going into it. We are in the seasonally weaker period and like I said – I would expect to see stocks come under pressure…. I am thinking somewhere in the 5% – 7% range for the Dow, the S&P, the Russell, and the Transports. I suspect that the Nasdaq will get hit a bit harder – somewhere in the 7%–9% range. Since the beginning of August, we have seen just that…. The Dow is off 1.7%, the S&P off 3.4%, the Nasdaq is off 5.8%, the Russell – 4.2% while the Transports are off 3.1% all from their most recent highs. And while I expect a bit more weakness, I fully understand that there is a lot of money on the sidelines – money that was waiting for that early summer correction that predicted the S&P would fall by 15% – 20%…. a call that so far has proved to be wrong…and so, if the market does sell off, I also expect there to be plenty of buy interest at those levels I identified above.
The PPI report helped send treasury yields higher – the 10 yr. rose to yield 4.166% – up from 4.081%, the 2 yr. ended the day yielding 4.894% up from 4.845%. The 3- & 6-month bills remain steady yielding 5.4% – 5.45% respectively.
Oil ended the week at $83.04/barrel after teasing as high as $84.90 earlier in the week. As I have been saying, it is the ongoing production cuts, rising demand globally that is expected to erode inventories – and that is expected to continue to drive oil higher. Additionally, it is the ‘robust strength’ in China that is driving the trend – as China remains a big buyer of oil – (refer to the Bloomberg article I included in Friday’s note)….…..all while they report a slowing economy….(which suggest a conflict in the data). This morning Oil is trading down 20 cts at $83 in what looks like some profit taking on the back of a stronger dollar. Now there is also a headline that is blaming this morning’s weakness on guess what? The sluggish Chinese economy!!! I mean it’s laughable! Look – oil is up 26% in 5 weeks – so some profit taking, and digestion is expected……
The dollar index – DXY…continues to push higher – it ended the day on Friday at 102.87…and why would that be? Because higher interest rates will strengthen the dollar – and that is what the dollar is telling us…. We are now between 2 trendlines – the intermediate trendline (support) at 102.31 and the long term trendline (resistance) at 103.36. The higher they push it, the more pressure that will put on the commodity complex – think gold, silver, and other precious metals along with oil and food commodities – Which is exactly what we have been seeing in that space. The BCOM – Bloomberg Commodity Index which was up nearly 7% as the dollar fell by 2.5% (in June) is now down 2.7% and will likely test a bit lower while the dollar has rallied by 3.3% – and will likely test a bit higher. This morning – we see the dollar holding steady at 102.82.
And that is causing Gold to churn. On Friday it fell $3 to end the day in 1946/oz… This morning it is holding right here as the dollar steadies…..….My sense is that it hold here as it was the low during the May/June sell off – when gold fell from $2120 to $1940 – before it rallied to $2020 – But again, it will be influenced by what the dollar does.
US futures are up small as they continue to thrash around …. Dow futures are up 47 pts, the S&P’s +9, the Nasdaq up 55 pts and the Russell is ahead by 2 pts.
There is NO Eco data today, but this week includes Tuesday’s Retail Sales expected to be +0.4% vs. last month’s +0.2%. Import and Export Price Indexes, Empire Manufacturing expected to down 0.7% (vs. +1.1% last month) and the NAHB Housing Index. Wednesday is a big day…starts with Mortgage Apps and then we will get Building Permits, Housing Starts, NY FED Services Index, Industrial Production, Capacity Utilization, and the July FOMC mins…Which are sure to attract some attention. Thursday has the usual suspects – Initial Jobless Claims and Continuing Claims along with the Philly Fed Business Index.
Stocks in Asia were all lower…. Hong Kong down 1.6% followed by Japan – 1.3%, Taiwan – 1.3% Australia and South Korea down 0.8% while China was lower by 0.75%. News that Chinese Property developer – Country Gardens was suspending the trading of 11 onshore bonds and that sent that stock down 19% as it gets ready to join a slew of defaulters IF they fail to make coupon payments within its 30-day grace period. Adding to the angst was news that Zhongzhi Enterprise Group – China’s largest private wealth managers missed payments on investment products – stoking fears of more defaults. Now, let me be clear – while a default would be a significant shock to China – neither of these events would disrupt global markets significantly, but if they happen it would be a short-term reason for some volatility.
Stocks in Europe opened a bit weaker – but at 5:30 am – all turned up. German wholesale prices fell by 2.8% in July – marking the 3rd month in a row of lower prices…. The strength in both US futures and European stocks being credited to an early morning story that Country Garden Holdings is seeking to avoid a default by extending the September 2nd due date.
The S&P sits at 4464 – down 5 pts on Friday and down 3.4% from its late July high…. Friday’s weakness – driven by the hotter PPI report forced the S&P lower almost kissing the 50 dma trendline at 4438 – Friday’s low was 4443. A bounce this morning would be just that – a bounce. My sense is that the trend is still lower and will remain so throughout the next 5 or 6 weeks….as we get ready for the next FED meeting in late September that could see rates rise again. Currently the terminal rate is set at 5.25% – 5.5%…. My guess is that they take the rate to 5.75% – 6%…which means either one more hike of 50 bps or 2 more hikes of 25 bps…. Either way – 6% here we come!
Our friends at Goldman are out this morning predicting that the FED will start to CUT rates next April…. Unless of course the economic data doesn’t support it. See how they did that?
We are now only days away from the first GOP debate – Set for August 23rd….and so far – we have Trump, DeSantis, Haley, Scott, Pence, Christie, Burgum and Ramaswamy who have all qualified (although Trump is on the fence about even showing up)…..Non-qualifiers are Hutchinson, Suarez, Elder and Johnson….but there is still time….or maybe not. Over the weekend – there is excitement building over VA Governor Glenn Youngkin – is he considering throwing his name in the hat as well? And then on the 24th – 26th we have the Jackson Hole Global Central Bank Boondoggle…. So – while August is usually a quiet month – maybe this year – not so much.
On the Democratic ticket – we have Joey, the party refusing to acknowledge that RFK or Marianne Williamson is even challenging him. Yesterday’s Meet the Press featured Minnesota Democratic Congressman Dean Phillips urging Democrats to get in the race as he has grave concerns about Joey’s reelection bid and weak polling numbers accentuated by the controversy posed by Hunter.
Phillips is a former marketing executive, and he says that data is NOT good, and that Joey should do the right thing and ‘pass the torch.’ He offered up Michigan Governor Gretchen Whitmer or Illinois Governor JB Pritzker…. Interesting that he did NOT offer up CA Governor Gavin Newsome who is drooling over the idea of moving into 1600 Pennsylvania Avenue.
Remember – politics do not price stocks in the long term……but it does provide for some entertainment and opportunity if the markets react to a political headline that causes stocks to fall….At this point in the race – political headlines hardly ever cause stocks to rally……In any event – the Presidential election cycle is in FULL swing- get ready for 14 more months of this.
I have been saying the mkt is tired….and I still do think it is….…. I still expect it to back off over the next 5-6 weeks. Patience is a virtue – especially at this time of year…. Do not chase names that are running away…. There are plenty of opportunities that will balance out and stabilize your portfolio for the longer term. Remember – Investing is a ‘long game’….
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.”
Sea Scallops w/Tomato Bruschetta
For The Bruschetta:
Ripe, Plum Tomatoes, Garlic, Peeled and Sliced, Olive Oil, s&p and diced red onion
Make the bruschetta and let it sit. Dice the tomatoes and place in a bowl.
Add the sliced garlic and diced red onion and olive oil and then season with s&p. Mix well and set aside
Rinse and pat the scallops dry with a paper towel. Now – sprinkle the scallops with the dried porcini powder on both sides.
In a heavy frying pan – heat the butter – add a drop of oil until it sizzles – do not let it burn!
Add the scallops – maybe 4 at a time – if you add too many – they will cool the pan and not sear properly. Sear on med high heat for about 3 minutes on each side. The scallops will have a light, crisp outer crust. – Remove and place on a plate – (Cover with tin foil to keep warm) and repeat the process until finished – placing 4 scallops on each plate.
Once you sear them all finish by spooning a bit of the bruschetta over the scallops and serve immediately. Serve with your favorite white wine. A simple – yet elegant dish.
Buon Appetito
