FEDS Ups the Ante, ECB Begins to Taper in Dec & China Tariffs Loom

“FED Raises Rates, Set Stage for Two More Increases in 2018”
 
 
As Mr. Rogers used to say: “Won’t you be my neighbor?” -
 
So the FED makes it firm and clear - expect 2 more rate hikes in 2018 - as the economy is strong, labor mkt is strong, inflation remains under control, macro data continues to support better days ahead - so sit back and expect a rise in September and December - and if that is not enough - we could do more - but that is not on the docket just yet...and btw - the FED will now hold a press conference after EVERY FOMC meeting to - as Uncle Jay (Powell)  told us - only improve the communication that comes out of the FED to the media and public mkts.  That news was met with a mixed reaction......does that mean that the FED could now raise rates 8 times per year (since there are 8 FOMC meeting/yr)? 
 
Jay was quick to respond to that - NO - that is not what it means - it only means that we can better keep the public mkts abreast of the thought process...and look - the FED can already do what it wants...they are NOT bound to only raising rates when they have a press conference - and while that may have been the way it has worked out - they could if necessary - raise them at any time and at any rate they deem appropriate - so don’t get your panties in a bunch - the only thing he did is say - ‘Look forward to hearing from me more often - so let’s get on with it...’
 
Mkts were mostly unchanged coming into the 2 pm announcement and  by 2:30 pm  – The Dow was down 77 pts, the S&P was off by 9 pts - Jay set the tone the moment he entered the room...he took to the podium standing up in front of the crowd - vs the way Yellen or Bernanke used to sit...he gave a short intro speech - which felt more like Mr. Rogers* - than the FED chair....very folksy, kind of grandfather ‘ish’ – (the only thing missing were the sneakers and the sweater)......setting the media at ease......as he said –
 
“The decision you see today is another sign that the US economy is in great shape”
 
[*For those of you too young to understand that reference – Mr. Rogers was an American television personality, musician, puppeteer, writer, producer, and Presbyterian minister. Rogers was known for creating, hosting and composing the theme music for the educational preschool television series Mister Rogers' Neighborhood (1968–2001), which featured his kind-hearted, neighborly, avuncular persona that connected to his audience – Wikipedia]
 
As we went on the mkt waffled trying to determine what was next – by 3pm – we were positive again and then weakened into the bell as the buyers became exhausted….and by 4 pm we closed on or near the lows – ending the day on the Dow down 119 pts, the S&P lost 11, Nasdaq gave up 8 and The Russell lost 5 pts….and in the scheme of things – those losses were minor for sure…. there is nothing panicky about them at all…. But I think what happened was in the end was twofold……
 

 The message may have gotten a bit lost on the media and then on investors – in the left hand they expressed confidence in their 2018 outlook and rate projections – but then on the right hand – it seems that traders are not sure that the FED knows how to assess what neutral rates should be or exactly how much inflation they are willing to accept before becoming more aggressive…

More talk of tariffs and the trade war with China – as June 15th - Reuters, WSJ and others are all saying that Trump will move forward with his $50 bil of Chinese tariffs tomorrow….and while that is the deadline – I think that a solution is coming – maybe in the 11th hour – but it is coming…. I could be wrong – BUT…….

 
So, before you start changing allocations and such – slow down a bit – the US economy IS in a good place – that is true – and if the European economy or Asian economies show weakness – then expect money to come to come here…and that is good for the mkts.   Now if we see a sudden spike in rates – like we did only two weeks ago – or if we see tariffs imposed -  then yes – stocks will come under pressure…. but don’t overthink it…If they come to an agreement and if rates advance at the slow and steady pace that Uncle Jay tells us then investors will take it all in stride.
 
Today it is all about the ECB (European Central Bank) and what Uncle Mario (Draghi) has to say….European bankers are meeting right now in Latvia  - which is a country located between Lithuania and Estonia and sits on the Baltic Sea….as they discuss how to end their ‘massive bond buying program’ that has also been in place for nearly a decade……They just announced a December target date to begin the process – and will keep rates low thru mid year 2019….but the beginning of the end is close…..so hold on….What will he say about the European economy?  What will he say about the ability of the European economy to withstand a rate increase?  What is he still concerned about?  European mkts are a bit on edge and are all marginally lower this morning as the clock ticks….and investors try to handicap the announcement…. FTSE – 0.52%, CAC 40 – 0.32%, DAX – 0.22%, EUROSTOXX – 0.36%, SPAIN -0.32% and ITALY – 0.66%. 
 
So, after the AT&T/TWX announcement – Comcast launched their $65 bil bid for the FOX units that are currently being pursued by DIS….and while this was not unexpected – it represents a 19% premium over DIS bid for the FOX assets….….and so – the heat continues to be turned up in the media/telecom/digital/Hollywood space…. Expect this story to continue for a while….
 
Eco data today includes Retail Sales – exp of +0.4%....
 
US Futures which were lower overnight have now recovered and are UP 2 pts as cooler heads prevail…. Overnight Chinese macro data was a bit weaker causing Asian mkts to end the day lower……
 
And while the O’Neil Methodology continues to support a mkt in an uptrend – they do make this comment…
 
“The S&P 500 recorded its sixth distribution day yesterday after reversing off early session gains to close down 40bps. The Nasdaq showed stalling action, also reversing off early session gains, but closing relatively flat in heavy volume. Though the count is elevated, both the S&P 500 and Nasdaq lose two distribution days next week. The action of leading ideas remains constructive; however, we continue to recommend buying as ideas find support off key moving averages or as they emerge from consolidation. Do not chase ideas that become too far extended from ideal pivot points.”
 
Translation:  The mkt could be a bit vulnerable up here now – but stick to the plan and stick to the ideas/themes that are working – buying ‘ideas that are finding support off key moving avgs’……
 
The Rotation chart has Transports and Energy turning lower and while still in the Outperforming and Improving quadrant – they do appear to be heading towards Weakening – not there yet – so we continue to watch.  …. Tech, Basic Materials and Healthcare names holding steady in the Outperforming and Improving quadrant while Utilities and Staples continue to underperform. Retailers – who have begun to lift their heads are now showing signs of turning – today’s retail sales data will give us more clarity.
 
Look – yesterday (again) we attempted to run up to and kiss 2800 but failed….and all this says is that buyers are tired and being a bit more cautious ahead of the central bank statements and possible tariffs.  If we weaken today – look for us to find some support temporary support at 2750 ish…but real trendline support is at 2710…. or 2.5% lower from here…. Global mkt action is NOT predicting this at all…. but stay tuned to what comes out of DC today and what comes out of the ECB meeting to determine the next move.  For now 2800 represents a wall.    
 
Oil is flat at $66.98.  US production is not at a record 10.9 mil barrels/day and OPEC and Russia are expected to ‘gradually increase’ production to prevent a spike in prices…. So, we remain in the $64.68/$67.62 range. 
 
Gold is UP $7 at $1,308/oz…. as commodity traders try to assess the ECB statement and the US/China tariffs possibilities.  If it breaks out here at $1310 – then a swift move to $1320 is not out of the question…a failure here will keep it in the $1299/$1310 range. 

Take Good Care

KP

Grilled Sirlon w/Arugula & Grana Padano 

There are only a couple of ingredients…. a nice piece of sirloin s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.   This dish is about simplicity….
 
Just FYI – Grana Padano – is one of the most popular cheeses in Italy.  It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored. 
 
Season your sirloin with s&p and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins. 
Heat your grill – Place the sirloin on the grill and sear for 4 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – - you do not want a thick piece….
 
Next – allow it to rest for 3 mins and then carefully slice it on a diagonal to make it look pretty. 
 
When serving - Place on a warmed plates and cover with fresh arugula & chopped red onion – that has been seasoned with s&p, olive oil and a squirt of fresh lemon juice – To finish – dress this with razor thin slices of the Grana Padano.  Serve immediately with a house Chianti.  
 

  
Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.