G20 Disappoints and Markets will Re-Assess

Last week investors prepared for what was being billed as a spring nor'easter - a storm that was supposed to sweep the East coast of the US, bringing 2 - 4 ft of snow across the region, add in the high tides along the eastern seaboard and it was supposed to be another disaster......NYC prepared for the worst - public transportation was all but shut down, and New Yorkers, New Jersey and Connecticut residents were told to stay home....and in the end - what did we get?  Some snow - but nothing like they prepared us for.....I mean - this IS NY.... and so the Nor'easter that was - really wasn't .....while it was a bit messy - it was more of an annoyance...and that my friends is also what the mkt and investors thought about the FED's commentary last week....

While the mkts were now well prepared for a rate hike - it remained a bit nervous over what the guidance would be......were we about to experience a Nor'easter in the mkts?  Was her commentary going to ignite a storm?  So unless you have been living in a cave - you now realize that like the snow storm that was supposed to create havoc and didn't. - Janet's commentary about the current state of the economy didn't create havoc either...Or did it?  I mean - investors drew a line down the middle - some, along with most of the media, heard 'dovish' commentary while others heard 'hawkish' commentary....(I heard hawkish - just fyi) .Yes - she raised rates by 25 bps, citing the need to 'get out in front of an overheating economy' yet she refrained from detailing any timeline going forward on the path of increases - she did say that there 'will be 2 more increases in 2017 and 3 in 2018......and that is Dovish how? 

Barron's points out that

  'heading into the meeting the market was expecting a rate hike, but dreading the possibility  that the FED would do more to slow the US economy given the recent rise in inflation'

And Marc Pinto - PM at Janus Funds had this to say:

"The language was dovish enough to give the markets some comfort that we weren't going to see a lot more tightening"

So apparently - since she did not sound more aggressive or more worried and since she appeared more relaxed - investors/traders and the 'big banks' took that as a 'dovish' signal and sent the algo's into overdrive and drove stocks higher...This is where I think  investors have it all wrong - because as we move into the spring (which kicks off today 6:35 am est) and the monthly PPI and CPI stats now begin to reflect the prior 12 months in their calculation (March, April 2016 - to present), I think we are about to see those figures jump....

Remember - it was last spring (2016) when those monthly reports began to improve - yet the 'prior 12 months look back'  then, continued to include months of weakness (think  all of 2015) which kept those figures in check - but now as the look back deletes the weaker months and starts to include strengthening months - then the numbers will start to look stronger and more concerning...and this is what I think the mkt is missing....all of a sudden I think we are going to see a jump in PPI, CPI figures (which makes sense considering she keeps telling us how the economy is improving) and that will necessitate a revised plan.....2 - 25 bps increases will no longer seem to enough to 'get out in front' of the inflation monster....so either we get more increases of 25 bps OR we get 2 bigger increases (say 50 bps) than currently expected.   I'm just sayin.....

Last week the Fed’s own forecasts for GDP growth were revised lower......The Atlanta FED GDPNow forecast is in decline, and has gone from 3% to +0.9% for  1Q 2017 growth...and Janet did a good job of discounting this reading - saying that it was just a 'noisy indicator'  - interesting that all of a sudden GDP forecasts are just noise, in fact - they are all just noise when the don't support your argument....it is easy to discount them individually and now FED Fund Future Futures see almost no chance of a May hike, and now place a 50% chance of a June hike on the table.  I think the Fed is stuck between a rock and a hard place - they NEED to get as many rate hikes in or at least get rates high enough BEFORE  the next recession hits so that they have room to CUT rates.....

Now the bumbling that we are seeing in Congress (by both sides) in supporting fiscal, economic, tax and health reform is going to become an issue for Janet.  If congress succeeds in delaying Trumps directives - and the FED continues to raise rates - Will that be the strategy that brings on the recession?  And if it does, Trump can then blame it on an aggressive FED thus supporting his plans to bail us out via aggressive reform policies....making the Republicans look like the savior going into the midterm elections.......Democrats need to be cognizant of this if they plan on taking back even one seat......

Look - let's be serious.....Janet was expecting to hike rates in tandem with the stimulus plans in order to mask the damage that higher rates will inflict - yet this does not appear to be in the cards right now.....Look 30 year mortgage money is now costing 4.25% (still historically low) but up from 3.25% only months ago..which means that a $500k mortgage has gone from $2176/mo to $2459/mo or 13% increase in carrying costs....and if rates go up again in June then the cost of carrying that mortgage increases again for any new home buyer.......Remember - You can never do just one thing...every action causes a reaction.....and higher rates will cause long term investors to re-assess mkt and individual stock valuations and IF those higher rates are coming during a downturn in the economy - then that re-assessment can be bigger than expected.

Over the weekend - the G20 met in Baden Baden, Germany and the conversation underscored the potential political risks ahead.  The group issued a statement that "notably avoided its usual pledge against protectionist policies".

Yale University's Stephen Roach was not encouraged by the results.....saying that

"The G20 financial leaders' dropping their traditionally strong support for free trade was disturbing  and reflected rising protectionism in the US....It's pretty disappointing when you get finance ministers from leading countries in the world who, are unable to validate the commitment to anti-protectionism which is the underpinning of globalization.  That's an obvious reflection of the shits in the political winds in the US and indicative of a US economy that is backing away from multilateralism.  It was a disturbing meeting"

European mkts are a bit lower on the back of this meeting as investors consider what the potential impact of trade barriers will mean for the global economy.  Both Angela Merkel - PM of Germany and Abe Shinzo - PM of Japan both spoke out in favor of 'free trade' policies in a blatant attempt to counter Trumps "America First" rhetoric....The French will be tuned into their first Presidential debate tonight  - the polls have Independent Emmanuel Macron and the Front National Marine Le Pen in a virtual tie.....although the smart money is still betting on a Macron win......FTSE -0.14%, CAC 40 - 0.28%, DAX - 0.3%, EUROSTOXX - 0.25%, SPAIN -0.34% and ITALY - 0.3%. 

US futures are down 2 pts - look for 2 FED speakers today....Philly's Patrick Harker at 8:30 am on CNBC Squawk on the Street and Chicago's Charlie Evans at 1:10 pm and while there are no economic reports - investors will be listening to these two to try and glean some 'inside information'.....I don't expect either to cause any real disruption in the mkts....

Oil is once again lower by 0.63/barrel at $48.16....as it continues to thrash around and find support.  Like I pointed out last week - the Saudi's are going to tire of being the one to cut production...and if the others don't fall in line - then look for them to punish those producers to prove that they are still in control.  If we breach the recent low of $47.09 - then a move to the November lows of $46 would not be out of the question.  That would be a 4% decline from here.....bringing the total decline to 25% since the OPEC announced production cuts...

Gold is up $1 at $1,231 as traders there continue to play wait and see.....Look for this metal to find support at $1,220 and resistance at $1,265.  

Take Good Care
KP

Risotto w/Cauliflower & Truffle Butter

 For this you need:

Diced Spanish onion, olive oil, butter,  2 Cups Arborio rice,  1/2 Cup dry white wine, Cauliflower Florets Cut Into bite size pieces, warm chicken broth, s & p, truffle butter and shaved Parmegiana cheese.

Heat the olive oil and butter in a heavy saucepan over medium heat.

Add the onions and cook until tender - maybe 10 mins...then add the risotto and stir until well coated with the oil mixture.  Add the wine and continue to cook until it is almost completely absorbed.
Next - begin by adding one ladle of the hot chicken broth, stirring frequently until it has been almost completely absorbed before adding more.  Continue to cook the risotto in this manner adding the broth one ladle at a time until the rice cooks.

While the risotto is cooking, heat some more olive oil in a frying pan and add the cauliflower.  Cook over medium low heat adding a tablespoon or two of  broth until the cauliflower is tender and just beginning to turn a golden brown.   Remove from the heat.

 
Once After cooking the risotto for about 25 mins, should be tender to the bite, stir in the cauliflower and a bit of truffle butter. Season with s &p to taste.   it is well mixed - serve the risotto into individual bowls, with a dollop of truffle butter.  Garnish with shaved cheese and serve immediately.

 
Buon Appetito.