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Pasture Fence, Barbed Wire, Fencing, Caution, Metal

Things you need to know 

  • Jay Powell managed to play on both sides of the fence
  • Algo’s and Traders took his comments as dovish – stocks rallied
  • CPI is out today…. T-1 hr., PPI is due tomorrow
  • Oil – surges up and thru $81/barrel and going higher
  • The dollar index breaking lower
  • Try the Shrimp Scampi w/Vidalia Onions and Chopped Broccolini

Again – yesterday was all about how Jay performed on Capitol Hill and if he was going to reveal anything new concerning monetary policy….

Appearing on Capitol Hill for his renomination hearing, Jay made it clear that the market does NOT want any more stimulus, that the economy is healthy and in need of tighter monetary policy – which means higher rates and a smaller balance sheet…..….and that the FED was prepared to deliver….He was also fairly confident that supply chain bottlenecks would ease – helping to reduce the threat of ongoing inflation –   But he didn’t back away from saying that if inflation remained a problem the FED would do whatever is necessary to contain inflation and prolong the expansion. 

What he did not do was offer up any specificity on the future path of monetary policy.  He did not commit to raising rates at any specific time – which doesn’t mean it’s not happening, but the algo’s assumed maybe it is not the schedule that many analysts suggest it will be March, July and then September…. (Goldy adds in a December hike as well). And so, stocks went from negative to positive as they tried to spin it as more ‘dovish’ – Which I think is very shortsighted.

No talk of any specifics surrounding balance sheet reduction either…. other than to say it could happen later this year and is just another tool for tightening.  – a topic that has become the latest ‘flash in the pan’.

In the end, I think he was deliberately vague to try and let it all calm down and stop stocks from sliding lower while allowing investors/traders and algo’s to digest all the latest information that has presented itself over the past week. His remarks on interest rates purposefully guarded ahead of the January 25th – 26th FOMC (Federal Open Market Committee) meeting.

What he did say was –

“If we have to raise interest rates more over time, we will…”  and that ‘over the course of this year, we will move more towards a policy closer to normal, but it’s a long road to normal from where we are.’   Which suggests that while rates will move higher, in historic terms – rates are still quite low.

He also offered up some clues on inflation that seemed to contradict his other comments – saying that in order to get a strong labor market, we need to have a long expansion and in order to get a long expansion we need price stability……and since high inflation is a threat to price stability – the implication is that the FED is fully prepared to go all in on raising rates to nip it in the bud…..capisce?  So, here is how I see it –  3 times is now a given, 4 times is becoming the expectation, 5 or more times would be like lighting your hair on fire sending yields soaring and stocks plummeting…….a place I do not believe he wants to be, but might be where he finds himself – no matter what….the jury is still out on this, and we will only know this as winter turns to spring and spring turns to summer.  In any event – I think we are behind the 8 ball – rather than in front of it.

The smart money is still betting that the first increase comes in March, and we will get more clarity on the 26th…remember – there is no February FOMC meeting, which does not mean that they can’t do something if they need to, it just means that after this meeting – we won’t formally hear from the FOMC again until the spring!  Recall that February (and July) is Humphrey Hawkins month – that is when the FED goes up to Capitol Hill for a two-day summit to address the House Financial Services Committee and the then the Senate Finance Committee and answer questions that most of the elected officials don’t even understand themselves.  But that is another story altogether.

At the end of the day – the Dow added 183 pts or 0.5%, the S&P’s up 42 or 0.9%, the Nasdaq gained 210 pts or 1.4% – no one should be surprised by that AT ALL, the Russell gained 22 pts or 1% while the Transports lost 28 pts or 0.2%.

Today will be all about the CPI (Consumer Price Index) report….and the expectation is for it to be HOT……up 0.4% m/m, up 0.5% ex food and energy m/m, while y/y reports are calling for 7% and 5.4% respectively. If it is even hotter than what we expect… then look for the talking heads to confirm a swifter taper, a swifter balance sheet reduction and a swifter move to raise rates and don’t be surprised if that conversation becomes a 50 bps move in rates vs. the expected 25 bps…. Remember – I am in the camp that we will see a 50 bps move at some point this year….and if we do – that would count as two moves….

Now if the report is surprisingly weaker (unlikely – but anything is possible) then it will take some of the pressure off those swift moves…and maybe pushes them back a month or two…or maybe not, because we have to wait for Thursday’s PPI (Producer Price Index) report which is expected to be kissing 10% – rates not seen since the late 1970’s.

The 10 yr. treasury yield ended the day at 1.74% and this morning it is anchored there as well as we wait for the 8:30 am CPI report.  Again, a stronger report will see that yield shoot higher….

Oil was up 4% or $3.10 to end the day at $81.33/barrel….and this morning it is up another 50 cts trading at $81.80 ish.  Do I need to say more?  The XLE up 13%, XOM +19%, CVX +9%, EOG +15%, SLB +23%, COP +16%, PXD +12% and this is just from January 1st, 2022!  Again – think the VALUE trade for ’22.

Crypto’s trying to find stability….and as the markets calm down a bit – the crypto’s are following suit.  This morning – we see Bitcoin trading at $43k – up from $39,500 on Monday while Ethereum is trading at $3,200 up from $2,900.  If, as investors hoped, Powell remains on the ‘dovish’ side of the fence then we should see financial assets churn and move higher – I am not in that camp at all – he is hawk (now) in dove’s clothing…. He must be…. just sayin….

Gold – which had been hugging the $1800 line shot higher on Tuesday – ending the day at $1,821/oz on the back of the Powell’s comments around inflation…. Remember – I pointed this out….and said that it had been hugging all 3 of its trendlines that were converging at $1,800/oz.   “It could test the November highs of $1870 if the inflation story continues to heat up…. while a failure to hold could see it plummet to the $1,750 range before it found significant support”.  My sense is that the move up – is suggesting that the gold market is assuming the inflation story is NOT going away….

The dollar index – DXY – which had been stuck in a sideways trading pattern – and was sitting right on its trendline at 95.87 – failed to hold and is now trading below this support at 95.60.  It’s in a funny place…. the real next level of firm support is at 94.67.  A move down will send commodities higher…. Gold, oil, lumber, soybeans, coffee, steel etc.…. and that will continue to play into the inflation story. Capisce?

This morning US futures are up…… Dow futures are + 50, S&P’s up 6, Nasdaq up 40 pts while the Russell is up 1 pt. Today will be all about the CPI report and then all the interpretations…. if the report is weaker (which would be a good thing but hard to imagine it to be true) it will be interesting to see how they spin it.  The chatter will go from today’s CPI to tomorrow’s PPI….so sit tight…. because for the next two day’s its all about the inflation story…  Good thing that earnings start on Friday – it will redirect the conversation for the next 3 weeks.

European stocks are also up this morning…. As investors there await the latest US inflation data and any hints of clarity surrounding that drama created yesterday.  At 7 am – markets across the region are all up between 0.25% – 0.5%.
The S&P closed at 4713….up nearly 1%…..If the smart money is correct, the CPI will come in right in line – leaving investors to speculate about whether or not we have hit the top……We ended on the north side of the trendline and need 4678 to hold if we test lower this morning….if the CPI is hotter, then I would expect yields to move up and stocks to come in…..but I guess what happens will depend on how they spin it….in the end – watch the 10 yr. yield……

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Chief Market Strategist, Consultant

Shrimp Scampi w/Vidalia Onions and Chopped Broccolini

You need – 1 lb. of large cleaned, deveined shrimp, butter, olive oil, garlic, lemon, white wine, clam broth, chopped broccolini, diced Vidalia onion, s&p & 1lb of linguine….

Bring a pot of salted water to a rolling boil.
In a sauté pan – melt butter, and add a splash of olive oil, add crushed/sliced garlic……and sauté…. keep heat on med-hi so that you do not burn the butter or garlic, next add in the onion, and chopped broccolini – sauté that for another 5 – 8 mins.
Now add the pasta to the water and cook for 8 mins.
Next add the shrimps to the sauté pan and let them turn pink and then flip them to the other side.  Now add the juice of one lemon, ¼ c of white wine and ¼ c of clam juice. – have a glass of wine for you – turn heat up to high and let it reduce by half.  Strain pasta – reserving a mugful of water – add pasta to sauté pan – mix and serve…. You may need to add back a bit of the pasta water to keep moist -as the pasta sucks up the juice….  Serve in warmed bowls with fresh grated cheese at the table.

Buon Appetito.