It's August 1st – Markets digesting July's surge

• Stocks end July on an UPTICK.

• Neely Khashkari is the new voice of the FED.

• Vlad slows the flow of gas to Europe – plan is to keep them cold all winter.

• The yield curve is still inverted.

• Try the Pesto Pomidori.

And July goes out with a BANG…. stocks rose again for the day and put it a great performance for the month…. making July 2022 the best month for stocks since November 2020!  Is this still a bear market rally? I say yes, it is – bear market rallies can be very strong and that is what traps so many into thinking it’s over…. If you go with the idea that maybe it isn’t then you won’t be disappointed when the decline takes hold again…. a decline that I think could take us back to the June lows of 3600.  Recall – that both Morgan Stanley and Goldman are suggesting that we could test significantly lower ~ 3100 ish….

For the day – the Dow rose 315 pts or 1%, the S&P gained 58 pts or 1.4%, the Nasdaq up 230 pts or 1.9%, the Russell up 12 or 0.7% and the Transports up 335 pts or 2.4%.  For the month – the Dow gained nearly 7%, the S&P up 9%, the Nasdaq, Russell and Transports all rose a bit better than 12% each – sending the message that inflation has seen its better days! 

Why?  Well, a couple of reasons.  Economic data is weakening and that means that investors are betting that the FED will pivot, I am not in that camp, and by the way – that is in complete contrast to the message out of the FED that we’ve heard.  On Sunday – Minneapolis FED President – Neely Khashkari was on Face the Nation  and he was very clear – the FED is focused on bringing the inflation rate back down to 2% saying that ‘we are a long way away from reaching that goal’….and that would suggest that rates will continue to rise in the months ahead.   
 
Next - this earnings season has not been the disaster that some had expected and that helped the tone…. but what investors are not pricing in are the expected cuts to forward estimates that are sure to come based on the guidance that the C suite is giving.  Recall, while 70% of reports have beaten the lowered estimates, the guidance has been very cautious and that is going to cause street analysts to slash 3rd and 4th qtr. estimates in the weeks ahead  - something I don’ think the markets have priced in yet.   

Eco data on Friday was strong – the Employment Cost Index – a new FED favorite data point rose by 1.3% - vs the expected 1.2% (that’s not good) - this speaks directly to the cost of worker pay AND benefits and it is going up – and that will continue to fuel the wage/price inflation spiral reminiscent of the Carter administration 43 yrs. ago.

The FED’s preferred inflation gauge – the PCE Deflator rose 1% m/m vs. the expected 0.9% and it rose 6.8% y/y in line with the expectation and UP from last month’s 6.3%....and this suggests that inflation did not wane in the month of June.  But when you recognize that some of the other data points are weakening – the expectation is that this month’s CPI and PPI due out next week on the 10th and 11th - will show a decline in the rate of inflation.  In fact, the estimates for the CPI show a slight decline in both m/m and y/y estimates and that is what helped to fuel the recent rally – so sit tight…. Just to be clear – no matter what – inflation is still running at 40 yr. highs and the road back to 2% is sure to be bumpy.

Eco data today includes:  the S&P Global Manufacturing PMI – exp of 52.3, Construction Spending of +0.2% and the ISM Manufacturing PMI of 52.  Now remember – PMI’s are important and both of these suggest we are still in expansionary territory – the one you want to watch is the Services PMI’s because that speaks to the service side of the economy and the US economy is a 75% service economy….And Wednesday brings us that statistic and it is expected to be mixed…..one in contractionary territory while the other is in expansionary territory….….S&P Services PMI of 47 while the ISM Services PMI is expected to be 53.7 (50 being the dividing line).

Later in the week – we will get the JOLTS reports (Job Openings Labor Turnover Survey) and that is still calling for 11 million jobs available, Wards total vehicle sales are also expected to be up by 500k autos – 13.5 mil vs. 13 mil last month. 

Mortgage apps on Wednesday and don’t be surprised if we see that down again….as 30 yr. mortgage rates rise....and Jerry Howard - CEO of the NAHB (National Assoc of Home Builders) tells us that ‘we are headed into a housing recession’.  Remember – real estate is an integral part of the economy – contributing about 15% - 18% to GDP every year….so a slowdown in this sector will subtract from GDP confirming the recent weakness we have seen.  Declines in home building and home buying has led EVERY recession since 1946 – why should this one be any different?

Builders continue to face multiple supply side pressures all while buyer demand takes a hit…. ….’Borrowing capacity’ is under pressure since mortgage rates have accelerated the fastest in 35 yrs. with 15 yr. mortgages now kissing 5% and 30 yrs. kissing 6%.  And we haven’t even discussed ‘adjustable rate’ mortgages and revolving credit which will re-price in the days and months ahead only adding to consumer’s monthly costs to carry. Maybe we can get Lizzy and Bernie to convince Joey to eliminate either or both of those monthly payments the way they did with student loans.   Think of the boost to the economy that would mean!

Friday brings us the Non-Farm Payroll report and that is expected to show an increase of 260k jobs (restored) vs. created…we have to restore the jobs LOST during the lockdown before we can really say that we created NEW ones…. wouldn’t you agree? 

Unemployment is expected to remain at 3.6%, as is the labor force participation rate at 62.2%.  Avg Hourly Earnings m/m +0.3% and y/y up 4.9%. while Consumer Credit is expected to surge (suggesting people using more credit – not a bullish stat). 

Sectors that outperformed on Friday – Energy – XLE +4.4%, (as Vlad cuts delivery of natural gas via the Nord Stream Pipeline to Europe), Consumer Discretionary – XLY + 3.8%, Industrials – XLI +2%, Tech – XLK and Financials – XLF both up 1.5%, Basic materials – XLB +1.3%, Real Estate – XLRE +0.4%, Utilities – XLU +0.8%  - Consumer Staples, and Healthcare declining 0.8% and  0.3% respectively. 

The treasury market remains inverted – is there anything else to say? We know what it means, but no one in the administration is acknowledging it.

Oil is retreating just a bit after the surge last week – trading down $1.80 to $96.77. Both Brent and WTI ended July in the loss column as surging inflation and higher interest rates raise the chance of a recession – expected to destroy demand.   OPEC is due to meet on Wednesday and they will be discussing whether to change September output.  2 of 8 members are hinting at a modest increase while the other 6 are suggesting that output will be held steady.  In any event – oil remains in the $88/$100 trading range.

Gold – something we haven’t discussed in a while was off 18% from the March high – testing $1700/oz.  It has since bounced and is now up 4.5% since July 21st as talk of a recession gets louder and louder.  This morning it is up $8 or 0.5% at $1790/oz.  Trendline resistance is at $1815 – keep your eyes on this level…. If it fails to pierce, then that suggests that investors are less worried about a recession – if though it trades up and through – then the reality of a recession takes on a new meaning.

US futures are down just a bit…Dow off by 17 pts, the S&P down 5, the Nasdaq lower by 22 and the Russell off by 6.

We are going to get another 100+ earnings reports this week….as the season winds down……expect to hear more of the same…70% beat and forward guidance is cautious….
European markets are up…. Better earnings reports continuing to fuel the move higher – this on the back of commentary from global central banks are suggesting higher rates are needed to tame inflation.  At 6:30 am – European markets are all up about 0.5%. 

The S&P closed at 4130 - piercing what I thought would be resistance at 4125…. While I do suspect that we might see some digestion today- it would not surprise me to see investors take stocks higher into Friday’s NFP report and next week’s CPI and PPI reports.  If we close well below 4125 then I think we test 3925 again…if we close above 4125 then I suspect that they will try to take the S&P to test long term trendline resistance at 4350.  In any event – keep your eyes focused on the end game…. Stick to the plan.

Pesto pomidori 

This is so good and so easy to make.

You will need ½ c of both walnuts and skinned almonds, 4 Roma tomatoes, garlic cloves, fresh grated pecorino Romano Cheese, fresh garden basil, olive oil and 1 tblspn of tomato paste and of course – 1 lb. of spaghetti.

Begin by blanching the tomatoes in hot water so that you can remove the skin – cut in half and then removes the seeds.  Set aside.

Bring a pot of salted water to a rolling boil.

While this is happening – put the nuts in the food processer and blend.  Now add 2 cloves of garlic, (3 if they are small), handful of fresh basil leaves, a bit of s&p, the cheese, and the blanched, peeled tomatoes – blend.

Now add in ½ c of olive oil and the tblspn of tomato paste – blend again.
When the water is boiling – add in one lb. of spaghetti – cook until aldente. 8 mins or so.

Strain – reserving a mugful of the pasta water.  Add back to the pot – and add a bit of the water to re-moisten.  Do not puddle.  When the pasta has absorbed the water – then add the pesto – mix to coat and serve immediately in a bowl with some fresh basil.  Always have more cheese on the table for your guests.  You can serve this will a light red or even a summer Rose. 

This dish should cost you about $15 to feed a family of 5.