JJ's hawkish tone stirs debate on rate cuts – Bond yields surge, stocks react

• JJ comes out swinging…. The data suggests ‘nothing done’ on rate cuts.

• Bond yields spike and then retreat.

• What will today’s 20 yr. bond auction reveal?

• Dollar rallies, Oil and Gold retreat.

• Will the host of talking FED heads create chaos later this week?

• Try the Grilled Shrimp over Orzo – a great spring/summer dish.

“There has been a lack of further progress this year on inflation – the recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.” – Fed Chair JJ Powell 4/16/24.

Well boys?  Does anyone have any questions now? Is it still a jump ball?  Is anyone unsure of what he said? Let me clarify – ‘The current state of monetary policy should remain in place UNTIL inflation gets closer to target.’  (read NO RATE CUTS).  Currently the target is 2% - although - remember last week – Mohammed El-Erian did ‘float the idea’ that maybe 2% is no longer realistic in this new economy saying.

“Inflation will be sticky, but that shouldn’t stop the FED, because the 2% target is too tight for a global economy going thru a major rewiring.”

Mohammed essentially saying that if the FED raised the target to say 3%, then they won the game and if they won the game then they could cut rates.

And while I think that was an attempt to test the market’s reaction – I am not in the camp that that is the correct thing to do.  We have now seen 3 months of rising m/m inflation numbers – and while 1 month doesn’t make a trend – 3 months does begin to make a trend – so cutting rates when the trend is rising doesn’t make zero sense – it makes LESS than zero sense – so let’s just toss that one out for now.

The current 5.25% - 5.5% fed funds rate has been in place since July 2023 – and yet the economy has not slowed measurably by any sense….it has not fallen off the cliff, job market remains strong, manufacturing and services PMI’s remain in expansionary territory, Industrial Production, Capacity Utilization and Durable Goods remain strong, Housing Starts and Building Permits are up, New Home Sales are up, Retail sales remain robust – and inflation m/m has turned UP not DOWN – so tell me again – Why is there this push to cut rates? 

Is it only because Jo Jo and his band of merry men have spent money like nobody’s business and the country’s debt are unsustainable and interest on that debt will be the bigger than what we spend on defense? Here’s a thought – stop the spending, cancel the stupidity, and get your house in order – now to be fair – this is a gov’t problem – BOTH sides have to be held responsible for where we are – not just Jo Jo – but remember – he is the President – so the buck has to stop at the WH – the same way in business – the buck stops at the C-suite.  In the end – HE has to bear responsibility – Period.

Ok – time to move on – this speech sent bond prices down and yields up – that’s not a good sign…. The TLT (20 yr. bond etf) fell 0.7% and the TLH (10-20 yr. bond etf) fell 0.5% - leaving the TLT down 11% ytd and the TLH down 8.5% ytd.

Yesterday Gunjan Banerji – a money and markets reporter at the WSJ posted this comment by the JPM crowd on twitter – (JPM was being very coy).

“Despite elevated yield levels…we think tomorrow’s auction will need to build in a greater concession in order to be digested smoothly!”

Ok – first – that auction is a 20 yr. bond auction today, next – don’t you love the way these Ivy league guys put it…. note the language ‘…build in a greater concession in order to be digested smoothly….’ Dude!  Really? What is that? Who are you?   Stop the antics and call it what is - What JPM is saying is that Treasury Secretary Janet Yellen should expect to be ‘low balled’ today…she should expect the buyers to be less aggressive, less competitive and that will send prices lower and yields higher.

On the back of that news - the 2 yr. kissed and penetrated 5% at 1:30 pm – rising as high at 5.006%…. Before settling in at 4.98%, the 10 yr. surged 9 bps going from 4.6% to 4.69% before ending at 4.66%. 

And on the back of those comments we saw the dollar index continue to trade higher….remember – the longer we hold rates higher the better it is for the dollar – and ever since they started hinting at changing the narrative last week from multiple cuts to NO CUTS the dollar has surged by 2.4% - leaving the dollar up 5.6% this year…a dramatic move for this asset.

And stocks continued to get hammered – although by the end of the day it was not a disaster…The Dow added 64 pts, while the S&P lost 10 pts, the Nasdaq lost 20 pts, the Russell lost 8 pts, the Transports lost 142 pts and the equal weight S&P lost 40 pts.

BAC reported and they beat (surprise) but investors and traders clobbered the stock (-3.5%) – while they did beat the estimate – the fact is that earnings dropped by 18%, and charge offs rose more than expected to $470 million – which was up by more than $190 million – charges offs is an ‘unpaid debt that the bank writes off as a loss – because they no longer expect to collect’ – think soured loans…..….Now a rise in Charge off’s is not good, but maybe that just means that BAC wasn’t very diligent when lending money….UNH on the other hand rose by 5.2% after reporting and beating their estimates. 

In the end investors/traders and algo’s need to focus on the fact that while rates may seem high to some people, they are not restrictive, and that inflation remains an issue. Rising bond yields are in fact a sign that corporate profits are strong – and while JJ made it clear that rates are not going down – that doesn’t necessarily mean the end of the bull market – Now if he said that rates are going UP – then we’d be having a different conversation…..…Earnings season has gotten off to a fairly strong start and I suspect that it will continue down that path, rising bond yields could be explained away as an outperforming economy requiring fewer to no rate cuts (which is a positive) – which is why I remain a buyer of stocks in a pullback….and remember – 3% to me is NOT a pullback….AAPL (a core holding) is down 14% off the high of December – that’s a pullback – capisce?  Now TSLA on the other hand is down 40% this year….and while some may consider that a pullback – I am not a TSLA fan, I have never owned it, so it could be down 60% and I would not buy it – It is NOT a name on my radar. So down 10% or 70% - makes no difference to me.

US futures are UP this morning – now that’s kind of odd, no?  I mean JJ remains solidly hawkish and stocks are positioned to move up.  Yes, why?  Well, first of all, there has been some pullback in the indexes and even more pullback in individual names – so there are some bargains.  Earnings season continues to produce ‘better than’ results. Forward guidance has not been negative.  Investors are recalibrating their bets on the future path of monetary policy and reassessing what strong corporate profits are suggesting.  AT 6:30 am – Dow futures are up 170 pts, the S&P’s up 20, the Nasdaq up 45 and the Russell up 16.   And let’s not kid ourselves - there are still some out there that heard something very different yesterday… they heard what they wanted to hear and that is that while he said higher for longer, he didn’t say ‘never’.  It’s comical!

Oil is hugging the $85 line testing both above and below it.  Nothing new to report – it’s just churn.

Gold on the other hand – did give back about $20 yesterday – ending the day at $2399/oz…this as the dollar index spiked higher and as trader types locked in some of the amazing gains, we’ve seen in gold over the past 2 months…. up 16%. Could we see gold trend lower still – sure and I suspect it will – possibly testing $2300 before it finds support.

The VIX did pull back a bit – after also surging over the past 2 weeks and this makes sense – especially if the markets are buying into the ‘no rate cut’ narrative – eliminating any speculation – because you see, when there is clarity, fear subsides, the market can function when there is lack of clarity, it becomes erratic and fearful.  Today it seems that the markets are clear about what’s next.

Eco data today includes Mortgage Apps and the Fed’s Beige Book – neither of which will be a definitive market mover.

European stocks – which ended the day lower yesterday are all up between 0.7% and 1.3%.   The focus in Europe is earnings….and some of the biggest European companies are not disappointing…  Adidas +6%, LVMH + 5%, Volvo + 1.4%, Rio Tinto +3.4%.  UK inflation data came in at +3.2% for March while the core rate (excludes food, energy and tobacco) came in at +4.2% – leaving the BoE in a quandary – How can they cut rates with inflation still high?  A:  They can’t. So, maybe investors there are clearer on what’s next.

The S&P closed at 5051 – down 10 pts.  And now solidly below the short term trendline at 5116 – which becomes resistance.  My sense is that while futures are pointing higher this morning – I am not sure that the pullback is over…. We are now in the 4920 (intermediate term trendline) and 5116 range.   Ongoing ‘better than expected’ earnings and better forward guidance will be the drivers now. I think it is fair to say that JJ made it very clear yesterday so there should be no confusion about rates. It came straight out of the horse’s mouth – it is time now to stop listening to the others – he is the chairman.  I can’t wait to see what Goldman Sach’s and Nicky Timaraos from the WSJ are going to write!  Remember – this IS always very orchestrated – This isn’t a shot from the hip move. 

But to add confusion – watch for speeches from FED members - Loretta Mester, Mishy Bowman, Johnny Willliams, Raffi Bostic and Austan Goolsbee today thru Friday.  In addition, the world will hear from BoE’s Andy Bailey, Governor Davey Ramsden and ECB council member Joachim Nagel all on Friday.

Staying in the game and buying core stocks on pullbacks is not the worst advice - buying some protection using the contra trades could also be helpful as long as you understand those trades are not Long-term trades at all. They are meant to be strategic and short term in nature.    

In the end - stick to your plan, talk to your advisor…..this is not the time to bail, but nor is it the time to chase stocks, but that does not mean you can’t put money to work in other sectors that are expected to outperform.

Grilled shrimp over orzo

Spring is here and Summer is coming....so get ready to try the Grilled Shrimp.

For this you will need:  about 2 doz large, clean & deveined shrimp,  10/12 skewers, olive oil, oregano, fresh lemon juice, minced garlic, s&p, feta cheese and some Orzo ( Orzo is a rice shaped pasta – used in many types of pasta salads or soups or in this case as a bed for the shrimps) .

Now we are going to grill the shrimps using skewers -

If you are using wooden skewers – you must soak them in water for at least 20 mins so that they do not light the fire and burn.

Now – pierce the shrimps onto the skewers – maybe 4 at most per.  Set aside in a deep Pyrex dish.

Next mix the olive oil, garlic, oregano, some lemon juice, s&p – shake well and then pour 1/2 over the shrimps.  Place in fridge and let marinate.

 Heat the grill – using a grill brush –clean the grill rack.

Bring a pot of salted water to a rolling boil and add the orzo…cook for about 8 mins or so…do not let it get mushy…. Keep it a bit aldente.  Strain and mix with the feta.  Now pour the remaining mix into the pasta with the feta and stir well to coat.  Place the orzo in a large family style platter and make a bed.

Next – remove the shrimps from fridge and place on hot grill….be sure to not burn…. should take no more than 5 mins max.  Now place the skewers on top of the orzo and feta.  Take a picture to remind yourself of this great and simple dish.