Fed week ahead: Sentiment up, yields up, markets on Pause/Feast of the seven fishes #5 bay

Stocks wavered on Friday and ultimately did a whole lot of nothing – despite a slew of economic data.

The Dow gained 104 pts or 0.2%, the S&P up 13 pts or 0.2%, the Nasdaq gained 73 pts or 0.3%, the Russell fell 10 pts or 0.4%, the Transports gained 117 pts or 0.7%, the Equal Weight S&P rose 15 pts or 0.2% while the Mag 7 rose 117 pts or 0.4%.

The long-awaited PCE report came in exactly as expected – no surprises in either direction. Personal Income and Spending? Also, right in line. And then we got the latest University of Michigan Consumer Sentiment survey – which showed a modest uptick but still sits deep in psychological recessionary territory.

The move from 52 to 53.3 is directionally positive — it suggests a bit of warming in sentiment — but it’s not a game changer by any stretch. It simply reinforces the idea that consumers feel slightly better about their finances and the economy than they did a month ago.

What’s interesting is this reading below 85 is typically associated with recessionary territory, yet we’ve been below 85 since July 2021 — and there has been no recession. That’s now more than four years of Americans feeling persistently cautious despite solid macro data — think inflation falling from its post-pandemic peak (+9.4% to the current 2.8%), unemployment at 4.4% suggesting full employment, GDP at 2+% and likely to stay there, firm services PMIs, strong factory and durable goods orders, and interest rates down 175 bps from their highs.

So, what gives? It’s the disconnect between the hard data and the consumer’s day-to-day reality. Prices remain far above pre-COVID levels, housing is still unaffordable, credit costs are biting, and the political noise only amplifies the unease. The macro says, “resilient expansion,” but the consumer still feels squeezed — and sentiment measures feelings, not spreadsheets.

Remember — prices for just about everything remain high after the inflation surge (2022 – 2024). And here’s the uncomfortable truth: the only real way for prices to meaningfully come down is through a recession. Anyone from the Greatest Generation or the Boomers remembers the recession of 1980/82 — it was ugly, painful, and disruptive, and it lasted two long years, but prices collapsed because demand collapsed because the economy collapsed.

So be careful what you wish for. The Fed could manufacture a recession if it wanted to — all it would have to do is hold rates right where they are and let the pressure build. In my view, they never should have raced into this ongoing rate-cutting cycle in the first place (100 bps would have been more than enough), but that’s water under the bridge now.

The point is: disinflation without pain is the dream, but history reminds us that real price relief usually comes with a cost. And that cost is job losses, earnings compression, tighter credit, and falling asset prices — painful, destabilizing, and politically toxic — but it is what it is. The flip side of this rate-cutting cycle, however, is the risk of rekindling inflation, and that’s a dangerous place to be as well.

Let’s also be clear: this entire situation stems from keeping rates at zero for nearly 15 years. Had the Fed begun normalizing earlier — think mid- 2021 — they could have managed a controlled slowdown and eased prices without the current whiplash. Instead, they stayed behind the curve, whether due to policy inertia, mis-reading the data, or an unwillingness to tighten into a politically sensitive environment.

And speaking of the FED – this week, and really the rest of the year, is all about what JJ and the FOMC deliver on Wednesday. We haven’t heard from Nicky T at the WSJ, and we haven’t seen a “Breaking Report” from Goldman hinting that JJ is about to surprise anyone. That suggests we should expect exactly what the market is pricing in: a 25-bps rate cut, bringing the total to 175 bps of cuts off the recent 5.25%–5.50% highs.

That being said, the party for 2025 is about over. After Wednesday, don’t expect markets to move much in either direction. I don’t think we get a meaningful selloff, but I also think we might get a 2% rally from here. And for perspective, and I say that because, a 2% move takes the S&P to 7000 — a new millennium marker for 2025 and a big, fat, round number that will get everyone excited… at least for a moment.

Bonds fell on Friday – the TLT lost 0.5% while the TLH fell by 0.4%. The 10-year yield is now 4.15% up 17 bps in 2 weeks while the 30-year yield is 4.80% up 17 bps over the same period as well.

So, you ask — Why are yields rising if the Fed is cutting? It feels counterintuitive, but there are three clear reasons. First, the bond market may think the Fed risks a reacceleration of inflation, so investors are demanding higher yields to compensate for that risk. Second, the market expects larger deficits and significantly more Treasury issuance, and more supply naturally pressures bond prices lower and sends yields higher. Third, long-term yields reflect expectations for future growth and inflation — not the Fed funds rate — so if investors believe inflation will remain sticky or growth will hold up, they will demand higher long-term yields regardless of what the Fed does at the short end.

Oil continues to trade in a tight range. This morning it is down 70 cts at $59.40 on Friday it rose 50 cts to end the day at $60.15 On Friday it pierced trendline resistance at $59.60 but failed to hold and this morning it is once again below resistance. In my view – we will remain in the $56/$60 trading range unless we get data that suggests supply is declining – which it is not.

Gold –is doing the same…..Churning in a tight range…. This morning it is up $12 at $4,211 while on Friday it fell $10 to end the day at $4,197. It remains in the $4,075/$4,370 trading range. My gut says do not be surprised if we see gold pull back on Wednesday – I mean its not like we don’t know the FED is cutting, so if they do, is that a reason to buy gold or is that a reason to take profits? We are about to find out what the gold bugs will do.

Bitcoin is trading at $92,000 while Ethereum is trading at $3,150.

The VIX remains in the ‘complacent zone’ at 16.37 and is now SCREAMING that ‘there is nothing to see here’ – which is exactly why you need to look!

This morning, US futures are churning…. The Dow +5, S&P +4, Nasdaq +45, and the Russell is +9.

European markets are flat. Germany in the lead up 0.25% while France is down 0.15%. Europeans are awaiting the FED decision on Wednesday. The jury is still out on whether the BoE is going to cut rates next week while the ECB is expected to hold steady. Both announcements are due on the 18^th.

The S&P closed at 6,870 up 13 pts— as we crawl ever closer to the all time high at 6920…..We are just 0.7% of a point away from kissing that level…and only 1.8% away from S&P 7000! This is not the time to fall asleep – S&P 7000 will be like the celebrating the new year…expect lots of champagne!

Feast of the seven fishes - #5 – Bay scallops in a black truffle cream

For this you need: Bay scallops (the little ones), olive oil, butter, heavy cream, white wine, shallots, garlic, black truffle, white truffle oil, s&p, Brussels sprout leaves and fresh grated Parmegiana and Medium Shells (optional)

Ok – you can make this dish in 15 mins…. Put a pot of salted water to boil.

In a large sauté pan – begin with a ½ stick of butter and a splash of olive oil – turn up the heat to med. Now add in the sliced shallots and chopped garlic…sauté in the pan for 5 – 8 mins…. now – turn up the heat and add in the rinsed, patted dry bay scallops – you want to hear them sear quickly.

If you are serving pasta – Add the pasta to the boiling water – stir.

Next – once the scallops are seared – turn the heat down to med and deglaze the pan with some white wine – allow it to steam off a bit – now add the heavy cream and shaved black truffle. Stir well. Now add in the white truffle oil – this is key – you DO NOT need much – it is very potent…add – mix, taste. If you need a bit more than do so…but go easy – do not overpower.

Now take the leaves of the Brussels sprouts (cut the bottom and the leaves fall off) and add to the pan – this will give a nice contrast in color. Season with s&p.

Taste the pasta – should be almost aldente…. strain – reserving a mugful of water. Add the pasta shells directly to the sauté pan – pour about ½ a ladle of the pasta water in the pan and mix well…. Taste and adjust if necessary. Next add a handful of the cheese and mix. You will notice that the shells capture the scallop and some of the cream sauce…. perfect.

Serve immediately. Enjoy your favorite white wine.