Things you need to know.

–         So, the 6 cut narrative isn’t really about 6 cuts.

–         Fed Governor Waller tries to reign it in. 5 more FED heads due out this week.

–         Stocks tumble, Vix rises.

–         The 10 yr. pierces 4%

–         Try the Zucchini Lasagna

Stocks tumble, VIX rises, the 10 yr. pierces 4% (again), Gold tumbles, Oil struggles, the dollar index is up, and Iran says that they have ‘nothing’ to do with the Hootie’s. (Really?). This in response to a wave of NEW attacks carried out by the Hootie’s against US and UK targets… and I guess they have no relationship with Hamas as well.

Fed Governor Chris Waller took the stage yesterday and pushed back on those ‘expectations of 6 cuts’ and reiterated the idea that the market is well ahead of itself and BAM…. stocks fall. Now, while Chris wasn’t overly hawkish, he was overly dovish either – saying that the FED should take a ‘cautious approach’ when they begin to change policy – and sees no reason to move quickly.  Ok – so why is anyone surprised?

We have been discussing this, it was always illogical to think the FED was (is) going to cut rates 6 times – but when the narrative takes on a life of its own – it appears that common sense goes out the window.  In fact – I think it’s illogical to think we are going to get 2 rate cuts…. Unemployment is at historic lows – at 3.7%, wages are now growing at 4% (supposedly) inflation is still well ahead of the target – so remind me – Why is the FED expected to cut rates 6 times?

And then in usual FED fashion – we heard from one of their favorite mouthpieces – Goldman Sachs – who came out and spoke.

“Comments by Governor Waller today raise the risk that the first cut could come LATER then our forecast of March and that the pace of cuts could be quarterly from the outset, rather than our forecast of three initial consecutive cuts followed by a switch to quarterly.”  All we need now is a follow up story by ‘deep throat’ Nicky T of WSJ fame. If Nicky follows up with the same story – then it’s done….

At the end of the day – stocks ended lower. The Dow gave up 230 pts, the S&P’s down 18, the Equal Weight S&P down 43, the Nasdaq down 28, the Russell lost 24 and the Transports gave up 128 pts.  And again – while stocks have been under pressure this year – it is by no means a fire sale…… The Dow, S&P and Nasdaq are down less than 1% – the Russell is off 5% while the Transports are down 3.5%…

A look at the 11 S&P sectors reveals weakness in Basic Materials – 3.6%, Energy – 3.5%, Consumer Discretionary – 2.7%, Industrial – -2.6%, Real Estate – 1.5%, Utilities – 1.5% while Financials are flat, Tech is up 0.1%, Consumer Staples +0.5%, Communications are up 1% and Healthcare is up 2.4%.  

Now Waller is the first of 5 FED heads that are due to speak this week – so pay attention…..Roger Ferguson – Former Vice Chair of the FED speaking first thing this morning – supporting Waller – suggesting that we could see 2 or 3 cuts but adding in that he thinks there is a possibility that there could be NO rate cuts this year…..which is very different story from the 6 cuts that the market is pricing in….. later in the week – we will hear from NY Fed President Johnny Williams, Atlanta Fed President Raffi Bostic, and San Fran’s Mary Daly….

Markets are now pricing in a 65% chance of a March rate cut – down from 80% last week and Ferguson expects that the March rate cut story will fade…..and while he did not put a date on a possible cut – keep in mind that it is an election year….the FED is NOT supposed to move rates in either direction in the 6 months prior of the vote for fear of being seen as political….so, when exactly would these cuts happen?  Think about it…. there is no opportunity to cut rates 6 times – but I guess they could cut rates once by 1% in May (effectively 4 – 25 bps cuts) – how do you think that works? 

In any event – bond prices tumbled, and yields rose…. this morning the 10 yr. is yielding 4.05%, the 2 yr. is yielding 4.28% while the short duration 3- and 6-month bills are yielding 5.14% and 4.96%. And if rates are expected to stay higher for longer – then I would expect nervous investors to bail and move into treasuries….

The VIX is now up 19% since last week – closed at $14.56 – which should also not be a surprise…we discussed this as well. (The VIXY etf gaining 3.3% yesterday) It is now hitting its head on trendline resistance at $14.99 and then at $15.36…. IF it moves up and thru then we could see the VIX trade up to the $18/$20 range in short order…and that will put more pressure on stocks. Just sayin’…

Oil – which has been all over the place in recent weeks – ended the day lower….down 1% at $71.90…this morning it is trading lower still at $70.84….The stronger dollar (think higher rates for longer) being credited to the weakness….offsetting any disruptions caused by the chaos in the RED Sea….I think oil remains in the $68/$75 range.

Gold is also lower on the idea that rates will remain higher and the dollar will remain stronger….…remember – commodities are priced in dollars – when the dollar rises – commodities usually come under pressure and when the dollar falls, commodities tend to rise…Gold failed to hold trendline support at $2030 – trading as low as $2020 overnight – so now look for $2015 to be tested next.  If the dollar continues to rise – I would expect that test to happen pronto….

The dollar which had traded lower on the expectations of multiple rate cuts – has now reversed course – as that narrative is no longer the story…. It has rallied by 2.6% to end the day at $103.40 – and is now kissing resistance at $103.45. If it pierces this, we could see the dollar test $104.24 – the December highs and if that is the case – then look for oil and gold to come under more pressure.

This morning US futures are lower yet again….as investors re-price risk…. Dow futures are – 175 pts, the S&P down 25, the Nasdaq down 100 and the Russell is lower by 28.   Earnings today include:  USB, PLD, SCHW, DFS & AA….

Eco data includes Mortgage apps – which were up 10.4%, Retail sales m/m of +0.4%, Ex autos and gas of +0.2%.  Industrial production -0.1%, Capacity Utilization of 78.7% and the Fed Beige Book.

European markets are all down – 1.2% across the board……. ECB member and Dutch Central Bank President – Klass Knot – telling us that ‘markets are getting ahead of themselves’ and while he does think it is possible to get inflation down to 2% – that ain’t happening right now, so get off that wagon. Inflation in the UK unexpectedly rose in December – ticking at 4% rather than the 3.8% that was expected. Core CPI – excluding both food and energy – rose by 5.1% – vs. the 4.9%. and all that means is – if anyone thinks rates are going to get cut multiple times in 2024 in Europe – they should think again…. it’s the same story…. just a different country.

The S&P closed at 4765 – we are at an area that offers NO real support and a look at the chart could suggest that if we trade down but fail to hold at 4680 – then S&P 4600 would not be unreasonable…..and while that sounds negative – it represents a 3.5% move from here… .Still WELL within a normal trading range.  I for one – hope we go there…. just think of all the bargains…and think of all the people who will fall out of the trees when we shake the branches…. It’s a great business…. if you have a plan….

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. 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 Kenny Polcari or SlateStone Wealth.

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, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Zucchini Lasagna – This is a vegetarian dish.

For this you need 2 green zucchini or 1 yellow and 1 green – slice them thin (lengthwise) using a mandolin.  Scallions, baby spinach, mushrooms, olive oil, seasoned breadcrumbs, & shredded mozz.

Begin by preheating your oven to 350 degrees.

In a sauté pan – add in the chopped scallions – and sauté. Next add in the spinach and sauté until it wilts down. Season with s&p. Remove and then sauté the mushrooms – allowing all of the water to evaporate – season with s&p.

Now set aside.

Next – using a Pyrex loaf pan. Line with parchment paper….and then dredge each slice of zucchini in the seasoned breadcrumbs (making sure you season them with s&p, and plenty of fresh grated parmegiana cheese. Now – build the lasagna.

Put one layer or zucchini, then add in a layer of the spinach/mushrooms and top with shredded Mozz, repeat until you have created 3 layers…On the top layer – end with shredded mozz.  Drizzle a bit of olive oil and place in the oven and cook until golden brown – maybe 30 mins max….

When serving – lift it out of the loaf pan with the parchment paper and slice. It’s an easy dish and a quick meal.  You can also use this as dish at a Sunday brunch.

Buon Appetito.