Things you need to know.

–        NVDA takes the Nasdaq up and through 17k!

–        Lonnie Musk using H100 chips in his new AI startup.

–        Everything tech goes up, while the broader market went down.

–        Bond auction (2’s and 5’s) was not well received. 7 yr. today.

–        PCE report if focus.

–        Try the Fresh Fettuccine with Shrimp and Spring Veggies.

Well, it finally happened, although I was a day late and a dollar short (I thought it was going to happen last week!)  Yesterday, the Nasdaq kissed and then pierced 17k and you can thank NVDA (again!) as traders, investors and algo’s took it up 7.1% or $76/share to end the day at $1,139 (This after testing as high at $1,148)!  What was yesterday’s headline?  Lonnie Musk announced that his AI startup – xAI – which just raised $6 billion and now has a $24 billion valuation – will be using NVDA’s H100 GPU chip.  Cathie Wood (think ARKK) putting in $60 million – representing about a 2% position, this is in addition to her 4% position in OpenAI (ChatGPT) and her 5% position in Anthropic. Wood’s telling us that AI foundation models should be worth a ‘multiple of trillions of dollars’ by 2030.

And this dragged anything ‘tech’ higher as well…all while the broader market appeared to struggle.  By 4pm – the Dow had given up 216 pts or 0.6%, the S&P up 1pt, the Russell lost 2 pts, the Transports gave up 87 pts, while the Equal Weight S&P lost 20 pts.  

And since there was not any real economic data, you ask why?  What happened? What derailed the latest rally?  Ok -hold your hats – because you know the answer – we’ve discussed this….Stocks (ex tech) and bonds both came under pressure because yesterday’s $70 billion 5 yr. treasury note sale and $69 billion 2 yr. treasury note sale were mediocre at best….and today we need to brace ourselves for the 7 yr. note sale……Remember – mediocre is not good….

As a result of this latest auction – the 2 yr. yield ended the day at 4.97% – up from 4.94%, the 5 yr. at 4.553 – up from 4.54% and the 10 yr. rose 8 bps to end the day yielding 4.54%.  Now what this means is that when Janet (Treasury Secretary Yellen)  brings new supply to the markets, buyers have to assess the risk while the treasury has to assess demand….as discussed ad nauseum – all that means is more supply means lower prices and higher yields and that is exactly what we saw yesterday and higher yields will pose a problem for stocks at some point…..

We’ve already seen what happens to stocks when the 10 yr. kisses 5% (think October – stocks plummeted by 9 – 12%). It’s not that there are not buyers for our debt, there are plenty – but they are becoming more discerning…they recognize that Janet will need to bring more and more supply to the markets to pay for the extraordinary outstanding debt that is building…. $34.58 trillion and counting…. And all that means is we should expect stocks to ‘re-price’ the risk based on this factor.  This should come as NO surprise to anyone. And while I am not sounding the alarm bells, I am reiterating the need to have a plan, that’s all.

Now all of this is happening ahead of Friday’s PCE report – which is the FED’s favored inflation gauge…..and while all of the chatter from the FED is and has been ‘higher for longer’ – there are still some holdouts that continue to expect the FED to cut rates ‘multiple times’ before year end and they are hoping that Friday’s report will be the catalyst for that move.  Swaps contracts are only betting on one cut, but it is a different group of asset managers that are betting on multiple cuts……  Never mind that Neely Kashkari – Minneapolis’s FED President and others reminded us that ‘everything is on the table including rate HIKES’. So, I guess, they could raise in June and then cut in July, September, November and December (that’s multiple times, right) …. that way – everyone gets something!

Now something that is not being discussed is the fact that starting today – the FED will launch a ‘series of buyback’s for ‘seasoned, hard to trade debt’ hoping to take that debt off the market – freeing up buyers (or creating new demand) to buy the newest cycle of debt while tapering (slowing) the pace of its QT (Quantitative Tightening) program – which should ease rates – without actually cutting them – Capisce? It’s all very orchestrated. The FED can ease policy without actually cutting rates…. funny how that works.

Now understand how they can and will position Friday’s PCE report….Consensus estimates are calling for a 0.3% increase  in top line and core m/m rates, but economists expect CORE PCE to rise by 0.2% for April and if that is true, then they can say that it is ‘the SMALLEST advance this year’  – see how that becomes a positive? And boom, if that’s the case – then they have to cut rates!  In any event – it is what it is, and we won’t know the answer until we do…. For now, I am still in the No Cut Camp in 2024.

US futures are under pressure…. Dow futures – 210, S&P’s -35, Nasdaq -130 and the Russell is – 22 pts. The 7 yr. treasury auction is later today and after yesterday’s tepid responses for the 2 and 5 yr., the sense is that we need to brace ourselves for further weakness. Julius Baer Equity Strategist Leo Pellandini tells us that.

“The higher for longer bond yields risk is biting into equity valuations and short-term pressure seems to be a given, nevertheless though, with inflation expectations moderating and interest rate cuts coming soon, we think markets can continue to climb higher.”

Ok – Leo – define soon?  Do you really think that the US data demands a rate cut anytime in the next 6 months considering that inflation is turning its head UP once again?  Or is soon being defined as sometime in the next year?

The only thing I see that could change my mind is if we start to see downside surprises in the coming inflation reads (and after the HOTTER PPI read two weeks ago, I just don’t see how we could see declining inflation) BUT, if that happens then watch out because that might suggest that the economy is weaker than suggested and that bad news is really bad news, so cutting rates would be necessary to try to prevent a hard landing.  A move that would most likely fail because they were ‘reactive vs proactive’…. unless of course they slash and burn rates – taking them back to sub-normal levels. Oh boy….it is a tangled web we weave.

Eco data today includes Mortgage Apps, Richmond FED Manufacturing, Dallas Fed Services and the FED’s Beige Book.

Oil – which had been trading under $80 barrel for the Month of May – suddenly pierced yesterday.  Remember, I said that many are now expecting oil to retake $80/barrel as expectations of the ongoing current production cuts out of OPEC+ and the beginning of the summer driving season here in the US.   And that is exactly what happened…. Analysts announced that they expect OPEC+ to continue the ongoing production cuts on Sunday just as fuel demand surges due to summer here in the US. This morning oil is trading at $80.50, just a hair below trendline resistance at $80.85 – where I think it will find some short-term pressure before pushing higher into the summer.

Gold continues to churn and bounce off of trendline support at $2350 as gold traders await the latest inflation data.  We have seen gold traders take some profits lately after gold surged to $2450 two weeks ago unsure of what the data would show.  Rate hikes will put pressure on gold and other precious metals, so we all await, but current rates held here for longer I think are priced in and so I think we are in the $2350/$2450 range.

Remember the VIX?  Remember how it was suggested that there was ‘No Fear’?  Remember how I said, all we needed was one catalyst to ignite the fire?  Well, yesterday the bond market was that catalyst and the VIX surged by 4.5% and this morning it is up another 1.1% at $14.  If the 7 yr. auction is poorly received – then watch as the VIX continues to push higher today…and if the PCE report is not what they expect – Well…. you know….

European markets are all lower….France and Italy both down 0.9% – this after a weak Tuesday…..as investors focus on rising global bond yields all while the ECB appears to suggest that a rate cut is on the way next week….but any further easing will be slow and gradual – that one cut does not mean another one is imminent.

The S&P closed at 5306 – up 1 pt…. – which was a win considering the Dow, Russell, Transports and Equal Weight all ended the day lower…..This morning – futures are down….Like I said yesterday, I think we are a bit toppy here, so I continue to look for a pullback – not a crash, just a nice healthy pullback to short term trendline support at 5,176 or even intermediate trendline support at 5,070. Neither of which is an alarm bell by the way…. either move is well within the normal trading band…. The alarm bell would be a test and failure of the long term trendline support at 4760 – something I do not see. 

Call me to discuss.   

Take good care,  

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

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Fresh Fettuccine with Shrimp & Spring Vegetables and      

This is simple to make and so good. 

For this you need – Fresh make fettucine, cherry tomatoes sliced in half, plenty of sliced garlic, broccolini and baby asparagus spears sliced into bite sized pieces, large shrimps – cleaned and deveined, olive oil, butter, chicken stock, s&p and fresh grated parmegiana cheese. 

Bring a pot of salted water to a rolling boil on the back burner.

In a large sauté pan, heat up ¼ stick of butter and a splash of olive oil.  Add the garlic and shrimp.  Cook the shrimp until pink on one side and then flip to cook the other side. Season with s&p.  Once the shrimp is cooked – remove and set aside – cover to keep warm.  

In the same pan add a bit more olive oil and garlic, now add the tomatoes, sauté for 5 mins.  Now add the broccolini and asparagus, add 1 c of chicken stock and allow to blend and steam off. 

Add the fresh pasta to the water – be careful, this will be done in 3 mins or so. 

Now add the pasta to the sauté pan with the veggies. Add in 1 ladle of the pasta water.  Add a handful of cheese, mix and serve – topping the dish with 3 or 4 shrimps.   

Buon Appetito