JJ ignites a rally – But is that what he wanted to do?

• JJ ignites a rally – but is that what he wanted to happen?

• What did he say? Nothing new. Rates will continue to rise until they figure it out.

• China reconsiders the zero covid rule – (yawn!).

• The House votes to avert a rail strike – Senate up next.

• Joey expects the bill on his desk by Saturday – so expect an 11th hr. DEAL.

• Try the Cavatappi w/Prosciutto and Peas.

There is only one thing you need to know about what happened yesterday…Jay Powell confirmed what we have been hearing all along…he could not have been any clearer – the increment of rate increase is going to start to slow in December to 50 bps but will continue to rise…….he went onto say that we ‘moving into a new phase of policy tightening in which they would TRY to judge how high rates need to rise’ and that he and his colleagues do not want to ‘overtighten’….(think soft landing).  And that is the key part of the speech that sent the algo’s into overdrive. I mean nearly everything assumes that the FED will overtighten – the same way they overstimulated – the same way a pendulum swings.

It's an analogy that works very well….because the economy is like a big pendulum…...it swings way to the left (over-stimulation) and then it returns and swings way to the right (over-tighten). You can’t stop the arc of the swing….The other way you can define it is like a moving train…..once you get it up to speed – you can’t just slam on the brakes and expect the train to stop – that doesn’t happen…and that is essentially what JJ said…..while they might TRY to slow it down and navigate a soft landing (and that is admirable) I do not see how that is possible. 

He went onto say that some sectors of the economy are beginning to respond to the 6 rate hikes we have seen so far – specifically the interest rate sectors – housing and real estate (which makes sense)….and then he qualified it by saying that declines in rents and goods have been insufficient and will remain insufficient until and unless we see a decline in hiring - if you read between the lines here – what he means is a rise in unemployment – where many have said that we would need to see that metric rise to 6+% and then remain there for 2 years in order to get inflation down to the 2% target…..BUT he didn’t actually say that or write that down, so the algo’s missed it…..and that sent stocks higher.

The speech ignited a ‘barn burner rally’! – The buy algo’s acted like it was a Taylor Swift concert as they rushed the front door while the sell algo’s (think Ticketmaster) slipped out the back door….trying not to get trampled – leaving a void in the supply side – You could actually say we had a ‘supply chain issue’ with the markets yesterday and that forced the buyers (think demand) to pay up for product (think supply of stock).

By the end of the day – the Dow gained 720 pts or 2.2%, the S&P up 122 pts or 3.1%, the Nasdaq added a whopping 485 pts or 4.4% (think of all those beaten up names that suddenly look ‘cheap’), the Russell added 50 pts or 2.7% while the Transports tacked on another 280 pts or 2%.  Both the Dow industrials and the Dow Transports are now in ‘bull market’ territory…. Yes, you heard that correct – both indexes are now up more than 20% off their fall lows…The Dow up 20.7% and the Transports up 22% - and that is exciting…. isn’t it….?  The S&P, Nasdaq and Russell remain in ‘bear market’ territory, but are trying hard to fix that….

Part of the extreme move can be explained away by all of those institutional, trader types and retail types that try to time the tops and the bottoms of any cycle….and when we get a reaction like the one we got yesterday – it leaves anyone who thought we were going lower and got out of the market or bought downside protection (which isn’t a bad idea necessarily) or were ‘short’ to recognize that – maybe they should get back in……vs. the ones that never got out and just ride the wave and take advantage of DCA (dollar cost averaging).

Now there is a difference – one set are ‘traders’ while the other set are ‘investors’. One set thrives on the micro moves while the other set thrives on the macro moves.  (I am in the ‘other’ set).

And then there was the eco data……Mortgage apps fell, ADP employment fell – creating only 127K jobs vs. the expected 200k – which is seen as a positive…revised GDP came in at +2.9% (better than expected), Retail inventories were weak and Chicago PMI was weak (both considered successful in the eyes of the FED) while Pending Home Sales plunged by 4.6% m/m and down 36.7% y/y (again welcomed by the FED)…. but the JOLTS job openings report continues to show that there are still 10.35 million jobs ‘available’ (the expectation was for 10.25 million)  and that is what JJ is worried about…..he wants to see that number fall….to take the pressure off of wages and attempt to kill demand.

And then we are hearing that China is reconsidering their zero covid policy…..which is exhausting…..China has completely mismanaged this….completely…..and the idea that the markets respond so dramatically is also exhausting…and then we learned that the Chinese gov’t is collecting phones to analyze them and see who was involved and who was at the ‘scene of the crime’ – which is even more unnerving not only for the Chinese but for the free world. What it says is that – ‘we got you, we know where you’ve been and who you talk to. We know what you eat and what you drink.  We know everything about you and now we are coming to get you.

But, again – when the tone of the market is positive then any news is spun as a positive…..just like when the tone is negative – the news is spun as negative. Which is why you need to stay focused and stay on the course.

The House voted to stop a rail strike and now it goes to the Senate where they need 60 votes to advance the legislation……Joey telling officials that ‘without action this week, disruptions to auto supply chain, our ability to move food to tables, and our ability to remove hazardous waste from gasoline refineries  will begin…..’  He expects congress to deliver a bill to his desk by Saturday.  Let’s see if that happens……it will be all very dramatic until Friday night at 11 pm….when Chucky (Schumer) tell us ‘We did it, we saved the country from a catastrophic rail strike’!  Again – exhausting….but dramatic…..and in the drama/chaos there is opportunity.

Needless to say – every sector ended the day higher – Tech – XLK up a whopping 5%, (a group that was down 27% ytd coming into yesterday), Consumer Discretionary -XLY + 3.5% (they were down 32% ytd), Communications – XLC + 4.25% (they were down 38% ytd), Semiconductors – SOXX added 6% (they were down 34% ytd), Artificial Intelligence – BOTZ added 3.6% (they were down 44% ytd) – The growth trade – SPYG gained 4.4% (it was down 29% ytd). Are you seeing the pattern yet?  The most beaten up sectors on the year – outperformed yesterday….Housing and retail while significantly lower on the year did not react with the same emphasis….XHB gained 1.8% (-30% ytd) and XRT gained 2% (-28% ytd).

Sectors that have not been so beaten up – did not advance with such gusto….they advanced but not with the same emphasis.  Industrials – XLI +1.6% (they were only down 5% ytd), Healthcare – XLV + 2.4% (they were down 4% ytd),  Consumer Staples – XLP added 2% (it was down -2% ytd).  The value trade – SPYV gained 2% (it was down 5%).  Energy XLE gained 0.5% (it was up 65% ytd) while Metal and Miners – XME added 3.7% (it was up 16% ytd). In the end – it was a good day IF you were in the markets and had money working for you.

Treasury yields immediately fell on the news but remain inverted…the 2 yr. now yielding 4.3%, the 5 yr. yielding 3.7% and the 10 yr. yielding 3.59%.

Oil is trading up 50 cts at $81.05 a barrel ahead of Sunday’s OPEC + meeting.  Will they call for production cuts to maintain the price of oil or will they leave it alone?  The speculation is running rampant.  Watch for $83.60 to be a level of resistance….under normal circumstances, but if OPEC + suggests that a cut is on the table -then watch as oil attempts to take back all 3 trendlines and resume its push towards $90/barrel.

And Gold?  That shot higher on the back of the news…and is up another $30 this morning…trading at $1790/oz. Leaving it in the $1735/$1824 trading range. A push up and thru $1806 (the November high) will give it gas to challenge the trendline at $1824. 

This morning stocks are digesting yesterday’s move…the Dow down 70, the S&P down 5, the Nasdaq down 40 and the Russell is flat.  Remember – JJ did not say anything really new…did he?  He repeated what he has been saying, so many will now ask – why the massive rally?  To which I might agree – yesterday’s significant move higher is a bit of a conundrum – that is NOT what JJ expected or wanted to happen at all….He did not say anything about rate cuts and in fact reiterated the idea that rates will continue to rise until they figure it out….So – sit tight and stick to the plan.

Today brings us the FED’s favored inflation read – the PCE and that is expected to be +0.4% m/m (up from 0.3%) and is expected to be 6% y/y down from 6.2%.  Friday brings us the all important NFP report…and that too is expected to show an increase of 200k jobs. Investors will be looking at what the unemployment rate is, and what hourly earnings are m/m and y/y.

Stocks in Europe are up because they also think JJ is about to cut rates…..Let’s be clear – he isn’t.  He said nothing about rate cuts at all…In the UK – factory orders declined – although less than expected while the S&P Global Manufacturing PMI came in at 46.5 up from 46.2 – leaving it solidly in contractionary territory.  At 6:30 am – markets across the region are up between 0.1% -  0.9%.

The S&P closed at 4080 – the high of the day – up a whopping 122 pts…. It was so strong that we bounced off of support at 3920 ish and then busted up and thru resistance at 4050…..which might now prove to be the new level of support – or maybe not…..I think that once investors dissect JJ’s speech and realize that he in no way indicated that a significant change in the plan – then they will settle down and begin to refocus on what lies ahead in 2023.

To be clear – rates are going to rise in December, January and March (at least) and if inflation is not responding at the pace he thinks it should, then we might see rates rise in April, May and June…..taking the terminal rate from the 5.25% (expected) to the near 7% (suggested by Jimmy B). Don’t forget that!  He put it out there for public consumption…there was a reason he did that….just so they can say – it was always a possibility.  Remember – Paul Volker had to really ‘shock’ the system in 1981 to stop the insanity….Let’s hope that this time it’s different.

As discussed – I think the markets will churn over the next 5 weeks…..Watch the PCE, CPI and PPI today and next week.  What will they suggest?  Or rather what will they reveal about inflation? My guess is that you just saw the bulk of the Santa Claus rally….I suspect markets to digest his speech and the move – I suspect we will see some ongoing ‘give and take’ and then end the year somewhere between 4000 and 4100.

Cavatappi with prosciutto and piselli

This is a simple dish and should take no longer than 15 – 20 mins to make and serve.
For this you need:  Cavatappi (pasta), thinly sliced Prosciutto - chopped, Olive Oil, Fresh garlic – thinly sliced, Fresh grated Parmegiana cheese, Chopped Fresh Parsley s&p and Fresh frozen peas – That you defrosted and blanched then set aside.

Bring a large pot of salted water to a rolling boil – Add the cavatappi and cook for about 7 mins – leaving it aldente.

In a lg sauté pan – add the olive oil and place over a med heat.   Add the chopped prosciutto and sauté for 2 – 3 mins.  Remove and set aside.

Next – add the garlic and cook until fragrant – maybe 1 – 2 mins…. Now turn the heat off and add back the prosciutto and peas and toss.

Strain the pasta – reserving mugful of the pasta water – add the cavatappi to the sauté pan and mix well.  If the pasta sucks up the oil – add back some of the pasta water to re-moisten.  Toss in a handful or two of the parmegina cheese and mix well.  Serve immediately into warmed bowls.