Countdown to CPI, will investors take it in stride?

• The clock ticks towards 8:30 – Will CPI create a storm?

• 10 yr yield holds tight at 1.62%, while the VIX spikes by 11%.

• Oil is rallying again as many east coast states report gas shortages.

• Jimmy Bullard says ‘Don’t be ridiculous – It’s too early to discuss’.

• Try the Pasta in Pink Sauce w/Peas.

Good morning…. Stocks continued to get hammered on Tuesday as the selling in the tech sector permeated the broader market and the Dow Industrials as rising concerns over inflation battered the markets for another day.  Financials, energy, and industrials took it the hardest – and that does make some sense since these have been the biggest winners since the start of the year.  Yesterday’s Dow decline of 475 pts represented the steepest fall in prices since the level of ‘angst’ was elevated as the 10 yr. the bond yield started to rise causing all kinds of underlying, simmering concerns over valuations, FED policy, inflation, and risk.  Current 10 yr. yield is hovering around 1.62%.... but where will it go today?

As we have seen – those concerns have been taken a toll on the Nasdaq and so many of its members and companies in the space – companies whose valuations had soared during the year of the ‘pandemic’, causing those very valuations to come under scrutiny and then attack.  And we have all seen the adjustment in prices that has taken place since the February highs – ranging from 5% to more than 50%!   But yesterday it was the Dow names that got kicked in the gut while the Nasdaq names rebounded off their lows – in a decent rebound that happened late in the day causing a much-applauded reversal of fortune - but still ended the day off 12 pts (which was a win), the S&P gave back 36 pts – all as we wait for today’s big reveal…. the CPI.

By now, you are well aware of what the concerns are and what investors are bracing for….Expectations for m/m are fairly benign, but there is a risk that they veer off course……while the expectations for the y/y comparisons are the ones that could set the fire…..now look – let’s not create any more hysteria than the media has already created over this reading……but let’s be honest with what could happen.  A bigger upside surprise will cause another wave of re-pricing – the extent of which will be defined by the surprise…..while a downside surprise might offer some relief at least until we get tomorrow’s PPI report……which will set the tone for next month’s CPI report…you see – the changes in the PPI take about 2 – 3 months to make its way down thru the chain and into the CPI report – and the PPI has been slowing rising for months now – so the effect on the CPI should be visible today and if it is not that will lead some to question the reliability of the report since prices at the consumer level are going up everywhere you look…..

Now the bond market hardly moved at all yesterday – the 10 yr. started the day at 1.6% and ended it at 1.62% as noted above….and that may mean that the whole inflation fear trade is overdone….that inflation is not an issue but rather it is more of a correction in equity prices only…..I am not in that camp at all, - remember, many of the big investment banks and boutique research housed estimate that the 10 yr. will be somewhere between  2% - 2.5% by year-end which the market seems to be ok with……or is it?  I will remain in the inflation camp until someone can prove to me that inflation is NOT happening – that those higher prices I am seeing are just my imagination playing games on me…. Either way – odder things have happened and if we get that upside surprise today then I would expect the bond market to react….so sit tight.

The VIX has upped its game and gone from 17.60 to 23.73 before settling at 21.30 - an 11% rise….in what may be a warning for volatility ahead.

This morning – US futures are down – Dow futures are off 100 pts, S&P’s are down 12 pts while the Nasdaq if off 70 pts…all eyes on the clock for 8:30….top line CPI is expected to grow by 0.2% m/m and 3.6% y/y (last month the y/y reading was 2.6%) …..the 3.6% being the largest jump in prices since September 2011….but Jay Powell has been very specific about why we will see this jump and reiterates that any jump will be ‘transitory’ and that the FED will remain accommodative…..….you see the March/April 2020 reading will fall off of the 12 month equation – so the plunge in CPI last year caused by the shutdown of the country is now no longer a part of this month’s CPI data – so that artificially low reading has been eliminated….and this will cause the calculation to go up…..and that is fair enough.

And then we have the PPI report tomorrow….so the hits keep coming…. because that is expected to rise as well….

Now look – yesterday - St Louis’s Fed President and TV personality Jimmy Bullard made his opinion clear – It is too early to even consider a change in policy and that he and his colleagues are fully prepared for Jay Powell to lead the conversation about when and how to proceed and that is being credited for the turnaround in the Nasdaq – again do you see the game?  On Monday they had Neely Khashari telling us that it may be approaching time to consider while yesterday they had Bullard saying – ‘not a chance’…..leaving some to ask – how come it didn’t help the Dow – and that response is simple……investors just needed to ring the register a bit – and since so many of the high growth names are now considered ‘value opportunities’ it made sense to take some money out of the big industrials that have held in fairly well… and get ready to redeploy it based on what happens this morning…..

European markets were mixed but have now all turned up….as investors cautiously await US inflation data….and make assumptions about what the FED may or may not be forced to do….the tone in Europe is that they do not expect any surprise at all, that the report will be what we all expect it to be so that the pressure to sell may abate and prices may stabilize….Ok….let’s see. At 6:00 the FTSE +0.71%, CAC 40 +0.15%, DAX +0.23%, EURO STOXX +0.38%, SPAIN _0.23% and ITALY +0.15%.  

DXY – is up 13 cts at 90.27…. leaving it solidly in the 90/91.04 range. 

Oil is rebounding trading back up above $65/barrel as reports of gas stations up and down the east coast begins to run out of fuel (think Colonial Pipeline cyber-attack) causing prices to push higher……what will be interesting to see is who uses this opportunity to gouge……

Bitcoin is trading at $57,000, Ethereum is at $4,300 and Doggy Coin is trading at .50 cts –

The S&P closed at 4152 – the collapse that we considered yesterday never happened and this morning while futures are lower – they do not appear to be in panic mode at all….in fact – today could be a classic ‘sell the rumor/BUY the news’ event….if the CPI is what we think it is, then all of the selling that we have endured over the past couple of weeks will turn into a buying opportunity….and I would expect to see the algo’s shift into overdrive – causing sellers to withdraw their offerings leaving that void in prices that will see markets surge….In any event – will today’s data cause the long-term investor to change his plan today?  Most likely not…. many longer-term investors have been preparing for this event all along – thus the selloff in high growth names and the rally in the value names over the past 4 months……. In any event – it is sure to be another nail-biter….

Pasta w/Pink Sauce and Peas 

This is one of those basic recipes that you can use on any type of pasta - it is easy to make and store and is always great.

For this you need:  Butter, Olive Oil, Spanish Onions, Carrots & Celery - all chopped, bag of frozen peas, Kitchen ready crushed tomatoes (not puree) s&p and fresh grated Parmigiana cheese.

Begin by melting one stick of butter with a bit of Olive oil.  Now add the chopped onions, celery, & carrots.  Cover and turn heat to medium so as not to burn the butter and the veggies.  Keep covered so that they steam and soften...about 20 mins.  Check the carrots to see if they are soft to the touch then you will know you are ready for the next step.

Puree the veggies in a food processor and return to the pot.  Add two 28 oz cans of - Kitchen ready crushed tomatoes (NOT PUREE) just crushed tomatoes.  (If unavailable - then add 2 - 28 oz cans of plum tomatoes that you crushed in the blender.)   Bring to a boil, then turn heat down to simmer, season with S&P, and cover... Add the peas - stirring occasionally for 20 mins. Turn heats off. 

Now bring a pot of salted water to a boil and choose a pasta - spaghetti, linguine, fusilli, mostaccioli, penne, rigatoni.... (you get the picture).  Add pasta to boiling water and cook for 8 - 10 mins.... you want it aldente - not mush.  Melt another stick of butter and keep aside.

While the pasta is cooking - fold in 2 cups of room temp - heavy cream into the tomato sauce...the more you add the pinker it gets...so you choose how pink you want it to be.  Next - add two handfuls of grated parmigiana and stir to mix well.  Strain pasta - always reserving a mugful of the pasta water to keep moist.  Return the pasta to the pot.... add the melted butter and coat well.  If you think you need to keep a bit moist - add some of the pasta water.... then add 3 ladles of sauce - mix well and serve - always topping off each bowl with a bit more of the sauce.  Keep extra grated cheese on the table for your guests.