25 years later — The battle continues

Before we talk about markets this morning, I want to (need to) acknowledge what today is.

Twenty-five years ago, today—September 11, 2001—our world changed forever.

I was on the 55th floor of Tower 2 of the World Trade Center that morning. And even though 25 years have passed, there are moments from that day that remain as clear to me today as they were then. The sights. The sounds. The confusion. The fear. And then, ultimately, the realization of what had just happened.

Nearly 3,000 people woke up that morning and did exactly what the rest of us did. They got ready for work, they kissed their husbands, their wives, their children goodbye. They grabbed a cup of coffee. They got on a train, boarded an airplane, walked into an office or reported for duty.

And they never came home.

Every one of them mothers, fathers, sons, daughters, brothers, sisters, aunts, uncles or friends. Someone who was loved and someone who is still missed today.

I was very fortunate that morning. So many others were not.

And I will never forget the firefighters, police officers and first responders who, while thousands of us were desperately trying to get out, they were running in.

Think about that for a moment.

But here’s something else we’ve learned over the past 25 years: September 11 didn’t end on September 11.

For thousands of survivors, first responders, recovery workers and others who were exposed to the toxic air and debris at Ground Zero, the battle continues today. Twenty-five years later, too many (me included) are now fighting cancers and other illnesses that have been linked to their exposure in the days, weeks and months after the attacks.

We survived that day. But for many of us, September 11 followed us home. And sadly, some of us who made it out that morning -or ran in to help others - are still paying a price today. And so, the battle continues.

But there is also ANOTHER group we must never forget.

The thousands of young American men and women who watched our country come under attack and answered the call to serve. They went to Afghanistan. They went to Iraq. They served tour after tour. Eventually they came home.

But for far too many, part of that war came home with them as well and the wounds aren’t always the ones you can see.

That is one of the reasons I am so proud to serve on the board of The Headstrong Project. Headstrong provides confidential, barrier free and stigma free PTSD treatment to our veterans and their families - the men and women who stepped forward after our country was attacked and who sometimes continue fighting those battles long after their service ends.

So, on this 25th anniversary, I’m asking you to do more than remember.

Honor them. Honor the men and women who answered our country’s call afterward.

If you’d like to turn that remembrance into action, please consider supporting me in this effort to support The Headstrong Project. Every dollar helps.

September 11 isn’t just history - it’s a day that changed me. A day that changed all of us. Twenty-five years later, its impact is still being felt by families across this country.

We remember. We honor. And we never forget.

Now—let’s talk about the markets.

Because if there was one market screaming for your attention yesterday, it wasn’t stocks. It was bonds. The bond market got punched in the face again yesterday—and this time, it wasn’t subtle. The TLT & TLH both lost 1.2% - leaving them down 7.3% and 6.5% ytd respectively.

The 2-year yield surged 12 bps to 4.55%, its highest close in more than two years. The 10-year jumped 10 bps to 4.94%, its biggest one-day move since May and its highest close since October 2023. And then there was the 30-year—up nearly 8 bps to 5.36%, its highest close since June 2004.

And this is where the bond vigilantes come in - the investors who effectively impose discipline when they think about inflation, deficits or government borrowing are getting out of control. They sell bonds, prices fall and yields rise.

And right now, their message is pretty clear: If you want us to own your debt, you’re gonna have to PAY us more. Exactly what I have been saying for weeks now…

But here’s the question I’m thinking about now because the FOMC meets next week - If Warsh hikes next week—does the long end calm down? Maybe.

A hike could initially settle 10s and 30s because the bond market says, OK Kevy—we hear you. You’re taking the inflation threat seriously.

But what if it doesn’t? What if Warsh hikes 25 bps and the 30-year STILL sits there at 5.35%...or goes higher? Then we’ve learned something very important. Because at that point, this isn’t just a Fed problem anymore.

It’s a bond-market problem. And that’s a much bigger conversation.

Now oil – at the root of the problem.

WTI surged through $100 yesterday and settled at $102.48, up 6.7%—its eighth consecutive advance and longest winning streak in three years. That’s still below the nearly $120 April high, but suddenly we’re back at levels we haven’t seen since May.

Brent surged 6.3% to $107.63, its highest since May, versus that April peak of $126.41.

Now, it’s about the speed of the move back above $100 that is forcing the bond market to reconsider the effects on inflation - and the Fed.

And don’t forget the diesel story that we discussed on Wednesday.

Retail diesel crossed $6/gal yesterday according to Gas Buddy - and distillate supplies remain tight and remember - diesel moves the economy. Trucks use it. Trains use it. Farmers use it. Construction uses it. Shipping uses it. Everything that gets grown, built, moved or delivered has transportation costs embedded somewhere in the price.

And THAT is how an energy shock becomes an inflation shock.

And then PPI showed up... August producer prices rose 0.4% m/m and 5.4% y/y, with energy prices jumping 4.2% during the month. So, no ‘Toto, we’re not in Kansas anymore’ and this isn’t theoretical. Oil is up. Diesel is up. Producer prices are up and yields are up.

And expectations for a Fed hike are up.

Which brings us to this morning’s CPI. And THAT is today’s main event, and it is not expected to be up sharply in fact, I’d call expectations benign.

So, if headline inflation runs hotter because gasoline and energy are exploding while core remains reasonably well behaved, then the Fed has a very interesting decision to make next week.

Because Kevin Warsh can raise rates 25 bps. He can raise them 50 bps. But he can’t open Hormuz. He can’t produce another barrel of crude. He can’t refine another gallon of diesel, and he can’t end a war. So, I’m still asking the same question: Do you use monetary policy to fight a geopolitical supply shock?

Now, I know the other side of the argument.

It’s not about a hike to magically bring WTI back to $75 -it won’t. And frankly, another 25 bps isn’t going to stop $100+ oil and $5 diesel from working their way through transportation, food, goods and other costs either.

What a hike CAN do is try to slow demand enough to make it harder for companies to pass all of those higher costs along. And maybe, more importantly, it sends a message that the Fed will not allow an energy shock to become embedded in wages, pricing behavior and inflation expectations.

But think about what we’re saying. We’re talking about intentionally weakening demand because we have a GEO - POLITICAL SUPPLY problem. So, to fight the inflation created by this problem, does the Fed have to slow the OTHER side of the economy enough to offset it.

And THAT is why I’m still not convinced a September hike is the right answer.

But the market is trying to pound it into me that I am wrong. Remember - I am in the camp that the Fed does NOTHING in September - and potentially nothing this year. Yesterday, though traders pushed the odds of a hike next week to roughly 70%.

I see it. I’m just not there yet. But if CPI comes in hot—especially at the core—then I’ll have to reconsider the call.

Now, Christine Lagarde – President of the ECB - apparently IS there.

While we’re debating whether Warsh should hike, Christine Lagarde pulled the trigger and raised rates again. The ECB raised rates ANOTHER 25 bps yesterday, taking its deposit rate to 2.50%—its second hike since the Iran war began.

Lagarde called the decision a “no brainer.” Oh boy…. here we go….

The ECB now sees inflation running 3% this year, 2.5% in 2027 and 2.1% in 2028—and Lagarde made it clear that higher energy prices are increasingly at risk of bleeding into food and core inflation.

So Lagarde took the bold step and made her choice. Now let’s see what Kevy does.

Stocks? They got whacked too—but they weren’t the story.

The Dow lost 317 points, or 0.6%, The S&P lost 45 points, or 0.6%, —its fourth consecutive down day. The Nasdaq lost 172 points, or 0.7%, the Russell got hit harder—down 1%, or 30 points, and that matters.

Because once again the SMIDs took the bigger hit. Higher borrowing costs hurt companies that actually need financing. And a 10-year knocking on 5% changes the valuation equation—especially further down the capitalization stack.

The Transports gave back 11 pts, the Equal Weight S&P lost 60 pts or 0.7%, while the Mag 7 gave up 58 pts or 0.2%.

Nine of the 11 S&P sectors finished lower. Materials and Tech were the worst performers, down 1.2% and 1.4% respectively. Semis’ lost 2.5%, Memory names lost nearly 5%, Disruptive Tech down 1.8%, Emerging Markets lost 2%, Metals & Miners down 3.7% and the list goes on.

Energy, unsurprisingly, was one of the few places investors could hide. This was opportunity.

But in the end - while war and supply disruptions push oil higher. Oil pushes inflation expectations higher. Inflation pushes bond yields higher. Higher yields push Fed expectations higher. And higher yields compress equity multiples.

That’s how this works.

And one more thing—gold didn’t save you yesterday either. Spot gold fell about 1% to $4,356, and silver – which is not something I usually refer to got hit even harder, down 4.6%.

Why? Because when the 10-year is screaming and the dollar is firming and the market suddenly thinks the Fed is about to HIKE, the opportunity cost of owning something that pays you nothing goes straight up.

So, as we head into CPI this morning, here’s where we stand:

WTI is up 54% since July, the 2-yr is yielding 4.55% up 36% since March, the 10-yr is yielding 4.94% - up 26%, the 30 yr is yielding 5.36% up 16%.

Gold is trading at $4,340, the S&P is down 3%, the Nasdaq is down 4.5%, and the Russell is down 5.8% off their recent highs.

Fed-hike odds ~70%. And now comes CPI – which is expected to be benign. So, hold onto your hats and sit down…8:30 is only hours away.

If Warsh hikes next week, don’t just watch the 2-year. Watch the long end. Because if Kevy hikes and the 30-year STILL refuses to calm down...Then this isn’t just about the Fed anymore. It’s about the bond market.

Ok – so overnight in Asia the selling continued….and apparently nobody over there liked what they saw either.

Japan got smacked—the Nikkei lost 2.2%. Taiwan down 1.6%, South Korea down 1.7%, Australia lost 0.9% while Hong Kong and China lost 0.6% and 0.8% respectively. And once again, it was BONDS and OIL driving the conversation.

After the surge in both Brent and WTI – the sell-off in bonds across the Asia-Pacific region continued. Japan’s 10-year yield is pushing toward 3%, while the 30-year is above 4% and they left the door open to further tightening. Australia’s 3-year surged as much as 20 bps to 5.05%—it’s highest since 2011—and New Zealand’s 2-year jumped 25 bps.

Think about what’s happening here. The ECB just hiked. The BOJ is signaling more tightening. The Fed is suddenly 70% odds to hike next week. Oil is above $100. And sovereign bond yields are rising around the world. Which leads me to ask – Are we starting a global rate HIKE cycle?

And here is a surprise- European markets are up the day after the ECB raised rates. This morning the UK reported a stronger than expected GDP print and that caused yields on Gilts (UK govt bonds) to decline, bucking the global trend. Early this morning all market centers across Europe are higher by about 0.5%.

US futures are also rising this morning after the beating it took this week – Dow futures are up 220 pts, S&P’s up 30 pts, the Nasdaq is ahead by 113 while the Russel is up 10 pts. I think it’s just about seller exhaustion -the media will say it’s about lower oil – WTI down 2.4% at $99.90. Whatever!

The S&P closed at 7591 down 44 pts – breaking down and thru the short term trendline support at 7,603 which leaves us vulnerable to test the intermediate term trendline 7491, which would be a 4.5% off the high – hardly anything to get your panties in a bunch about.

Now, as I pointed out yesterday – if we continue to see yields rise and the 10-yr pierces 5% then that will put more pressure on stocks – I am in the camp that we could see an 8-10% drawdown this fall - which means another 3.5 – 5.5% from here – and if that happens we would be looking at a range of 7,170/7,325 on the S&P and that is KEY because the long term trendline is at 7,160.

Remember – a 10% drawdown is considered well within the normal trading pattern for stocks, it will get a bit more concerning if that doesn’t hold – but let’s not go there just yet. A drawdown of more than 10% puts us in ‘correction territory’ while a drawdown of more than 20% puts us squarely in bear market territory and for that to happen, we’d have to trade down to 6,250 – something that I don’t’ see.

Remember – on any pullback, sectors that have outperformed are more sensitive and may get hit harder – which speaks to knowing what you own and why you own it. But for now, the economy remains strong, there is nothing weak about it and while inflation may be ticking up a bit, we are nowhere near a recession. And in the end -remember – there is always an opportunity somewhere.

Paglia e fieno (Straw & Hay)

After a morning like this, maybe the recipe should be about something more than just what we're having for dinner.

For me, food has always been about family. It's about gathering around the table, telling stories, laughing, arguing, raising a glass and spending time with the people you love. And if the last 25 years have taught me anything, it's that we should never take those moments - or those people - for granted.

So, this weekend, make something simple. Invite someone over. Open a bottle of wine. Put the phones away. Sit around the table a little longer than usual.

Because in the end, those are the moments that matter.

And this one is perfect for sharing—Paglia e Fieno, or “Straw and Hay.” A classic combination of golden egg pasta and green spinach pasta tossed with prosciutto, peas, cream and Parmigiano. Simple, comforting, beautiful—and meant to be shared.

Prep time: 15m

Cook time: 19m

Total time: 34m

Serves: 4-6

Ingredients

1/2 lb each egg fettuccine or tagliatelle, & spinach fettuccine or tagliatelle, butter, olive oil

4 oz prosciutto, sliced into thin ribbons

1 finely chopped shallot

1 c frozen peas

1 c heavy cream, freshly grated Parmegiana - Reggiano, s&p, dusting of nutmeg (optional).

Preparation

Step 1

Bring a large pot of salted water to a boil.

Step 2

While that's heating - melt the butter with the olive oil in a large sauté pan over medium-low heat. Add the shallot and cook gently until soft and translucent. Add the prosciutto and cook just until it begins to crisp around the edges.

Step 3

Add the peas and cook for another minute or two. Pour in the cream, season with pepper and a touch of nutmeg if you like. Let it simmer gently until it begins to thicken.