Things you need to know.
– NFP report blows the roof off the house – which btw was kind of expected.
– The idea of NO rate cuts is now being considered.
– Oil up, Gold up, Bond yields up.
– It’s a busy week – CPI & PPI, Global Central Bank statements and the start of earnings season.
– Try Leo’s Linguine
The story keeps changing…..Jobs continue to grow at a brisk pace, the FED heads now pushing (testing) the idea of actually saying ‘NO rate cuts’ (no kidding!) – this vs. the ‘multiple rate cut story that the traders were pushing – caused by the ongoing double talk that has been ‘the narrative for 5 months now’….. – Remember – it was the Dot Plot in November that created all of this drama and while it suggested that there were some FED members that saw lower rates it by NO means WAS policy. JJ has been very clear saying all along that patience is a virtue, that he was in NO rush to cut rates – it was the street that created that multiple rate cut narrative aided by FOMC members that sat on the fence.
The blowout NFP report on Friday – confirmed the need to ‘do nothing’ – it showed a gain of 303k new jobs vs. the expected gain of 230k jobs signaling to the markets that the economy is just fine and that current rates are not an issue. This was the 5th straight month of job growth exceeding the expectation – so suddenly – there is NO real urgency to cut rates – imagine that! But instead of seeing a broad negative reaction – investors and traders apparently took it all in stride.
We saw Oil and Gold continue to move up, Bond yields Up (which means bond prices are down) all as stocks traded higher on Friday – taking back about 75% of what they lost on Thursday- but still leaving stock prices lower for the week. At the end of the day – the Dow added 310 pts or 0.8%, the S&P’s up 58 pts or 0.1%, the Nasdaq tacked on 200 pts or 1.25%, the Russell rose by 10 pts or 0.5%, the Transports up 120 pts or 0.75% while the Equal Weighted S&P gained 45 pts or 0.65%.
The idea that strong economic activity and a strong job market was a headwind for lower inflation is suddenly not the concern any longer…in fact – JJ has now signaled that he is NO longer worried about the stronger job market forcing wages higher – why? Because of all the immigration that has happened under the current administration. Hiring – in the services industries – is not being met with higher wages any longer –so the risk of overheating is a moot point. (For now.) Remember – the US is a 75% services economy and while services remained hot, they are starting to show signs of easing and that is because of the influx of ‘new’ workers – so the focus now is squarely on inflation and not so much on the strong job market.
This is a busy week – we have US inflation data, the start of 2nd qtr. earnings and an ECB interest rate decision.
Wednesday brings us the all-important CPI number and Thursday brings us the latest PPI number. Expect all eyes to be keenly focused on these data points – because both the January and February m/m numbers were hotter than expected. The CPI estimates suggest that we will see m/m prices up 0.3% for both the top line and the core rate – which is just a hair below last month while the y/y top line is up 3.4% (vs. +3.2% last month). The y/y core read is expected to be up 3.7% – all these numbers are well ahead of the 2% target rate that the FED is aiming for.
Thursday – bring us the PPI number and final demand y/y on the top line and the core rate are expected to be up as well – and so my guess is that nothing changes….and the narrative is now – ‘steady as she goes’.
Fed fund futures are still pricing in 2 rate cuts in 2024 – something I still think is illogical but could happen at the November and December meetings. Rate cuts prior to that do not seem possible to me and after all of this data, JJ would have a hard time justifying such a move just months AHEAD of the election.
Of the 11 broad industry sectors – the Industrial’s led the way – the XLI +1.4%, followed by Tech – XLK + 1.1%, Energy – XLE +1.07%, Communications – XLC +1.02%, Financials – XLF +0.95%, Healthcare – XLV + 0.9%, Basic Materials – XLB +0.9%, Consumer Discretionary – XLY + 0.6%, Real Estate – XLRE + 0.6%, Utilities – XLU + 0.3% and Consumer Staples – XLP + 0.2%.
Further down the list – Homebuilder – XHB + 1.4%, The Growth Trade – SPYG + 1.5%, Semi’s – SMH + 1.25%, Metals and Miners – XME + 1.4%, Cybersecurity – CIBR + 1.25%, Aerospace and Defense – XAR + 0.6%, Oil and Gas Exploration – XOP + 0.9%, Expanded Tech – IGM + 1.3%.
The contra trades – DOG, PSQ and SH all lower, while the VIXY (fear trade) bucked the trend and rose by 2% – which is a bit confusing, right? You would think that the fear trade would subside on an up day – but maybe what the VIXY is telling us is that it is NOT completely convinced that rates can’t actually go UP if the strong economy continues to get stronger. (Just a thought…. nothing to get all worked up about – yet). I mean look at what happened to the Bond Market….
Bond prices fell and yields rose! The TLT fell 1.4% while the TLH fell by 1% – The 2 yr. yield up 10 bps to settle at 4.75% while the 10 yr. was up 9 bps to end the day at 4.4% and likely going higher – especially as Janet is forced to bring more supply to the market – which is what the VIXY just might be concerned with. Recall – 5% 2 yr. and a 4.75% 10 yr. will be a headwind for stocks…. Not a disaster – but certainly a headwind.
Oil ended the day at $86.90 after testing a high of $87.50 – this morning it is consolidating a bit – trading at $85.90…. For 2024 – the Energy sector is now in the lead – up 16% ytd…. well ahead of Communications – XLC + 13%, Financials – XLF + 10%, Industrials – XLI +10%. The sector’s valuation rising to the highest levels since JJ started raising rates. Oil is benefiting from 4 themes, an improving global economy, growing demand, OPEC+ production cuts and lots of geo-political unrest. We have now busted up and through the September 2023 high of $85 – with an eye on testing $90. – Something that will make the Saudi’s very happy and will allow the oil companies to post stronger earnings and hopefully increases in divvy’s. 2 key themes that always drive stock prices up.
Gold – is also enjoying the company of buyers – think global central banks – as geo-political unrest remains high, thoughts of a FED pivot remain part of the narrative even with a stronger economy and ongoing inflation. On Friday – we saw gold rise by $40 to end the day at $2,345 – now up 14% off the February low of $2000/oz. And while I continue to think it is a bit stretched – it continues to trend higher. This morning – Gold is up $10 at $2,355 – like so many other things – once enough people believe a narrative, that narrative becomes self-fulfilling. Until it doesn’t.
At 5 am – futures are suggesting a muted opening…. Dow futures are -16, the S&P’s -4, Nasdaq -2 and the Russell is flat. As noted – Wednesday’s CPI and Thursday’s PPI are clearly in focus and then on Friday – we get the start of the beauty pageant – results from the big banks and asset managers – JPM (+16%), C (+20%), WFC (+16%), BLK(-2%) & STT (-2.2%) – recall that JPM is the first Dow member to report – officially kicking off the season – something that I think is a bit irrelevant today. Earnings in the sector are expected to be up 3.7% y/y while revenues are expected to be up 2.4% – but the market knows this – the group is up 10.5% this year – any disappointment will certainly see those stocks fall. As usual – it will also be about the forward guidance and the Loan Loss Reserve Acct. If these banks continue to put more money away into these acts – is that suggesting that they expect tougher times ahead (think rising defaults?) Overall – estimates have remained fairly stable, estimates for core net interest income have improved and the improving macroeconomics have the potential to surprise to the upside.
The is no eco data today that will drive the action…..the action will be driven by the ‘speculation’ of what is about to happen later in the week.
European Stocks are mixed…. Italy +0.5%, while the UK is flat. Everything else is in between. Wednesday – the Reserve Bank of Australia (RBA) is expected to push back on any idea of easing while on Thursday the ECB is expected to keep rates unchanged, but traders continue to price in cuts in the coming months – again – do you see the narrative? It is the traders that are pricing in rate cuts, not the ECB policy statement. In fact, I would argue that the ECB has done a good job of trying to push back on that narrative.
The S&P closed at 5204 – up 58 pts. My sense is that we could see the market test a bit lower – maybe the 5125/5150 range as we move through the week. Wei Li – Global Chief Investment Strategist at Blackrock continues to talk out of both ends – on one end she is still calling for a June cut while on the other end acknowledging that the strong payroll number and strong labor market make a June cut ‘debatable’ – Do you think? JJ keeps hinting at doing nothing, remaining patient, while Minneapolis FED President Neely Kashkari and Former Fed Vice Chair Roger Ferguson float the idea of NO RATE CUTS this year. Let’s see what the data suggests.
Stick to your plan, talk to your advisor…..this is not the time to bail, but nor is it the time to chase expensive (growth) stocks, but that does not mean you can’t put money to work in other sectors that are expected to outperform. In the end – know who you are, what your risk profile is and make sure your goals are aligned. Talk to your advisor or call me to discuss.
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Linguine w/Roasted Garlic and Cherry Tomatoes
This is a great recipe and so simple to make. You need – 3 heads of roasted garlic bulbs, Cherry Tomatoes, s&p and plenty of freshly grated Pecorino Romano Cheese.
Preheat oven to 400 degrees.
Chop the top of the garlic bulb off and then top with olive oil. Place in a tin foil wrap and roast in the oven for 30 mins or so. (or until nice and browned). Remove and let cool.
In a large sauté pan – squeeze the roasted garlic out of the bulb and add in whole cherry tomatoes and some olive oil. Season with s&p. Keep the heat on med and let the tomatoes cook slowly – you can use the back of a slotted spoon to crush some of them, leaving the others intact.
Bring a pot of salted water to a rolling boil – add the linguine and cook until aldente.
Now – using tongs – serve the pasta (directly from the pot) into individual bowls – making sure to twist it so it looks pretty.
Next add a ladle of the cherry tomatoes on top and finish it with the fresh grated cheese. You can enjoy this with some toasted garlic bread and a glass of either a light red or chilled white wine.
Buon Appetito
