PPI confirms that the Fed is not done

• Investors, traders and algo’s took a breath -stocks stabilized.

• There is an 11th hour rail workers contract deal – but it is tentative.

• PPI confirmed what we learned from the CPI – Prices are too damn high.

• Oil pushing higher $89 – US to replace the SPR when oil trades to $80.

• Futures are up slightly, lots of eco data to digest.

• Try the Sweet Sausage, Chicken and Sweet Vinegar Peppers.

In case you were really worried about a freight rail strike on Friday – that threatened to bring the US economy to its knees and halt all long distance Amtrak service– you can rest easy – as expected everyone pushed until the 11th hour and then came to a deal…all very dramatic – with the headlines making it clear that an agreement came after ’20 consecutive hours of negotiations’….what that leaves out is the fact that these negotiations actually started 3 years ago….the 140,000 rail workers frustrated that they have not gotten a raise since 2019 and now that they are getting mauled by 40 yr. high inflation – they want enough of a raise that offsets the damage done by soaring prices, they want more time off and they want better working conditions………. The WH and labor secretary Marty Walsh taking credit for bringing the multiple sides together and striking a deal… - but let us be clear – it is still ‘tentative’……. but the rail stocks are up……UNP quoted up $5 or 2%, CSX quoted up 50 cts or 1.5%, NSC quoted up $5 or 2%.

Now, Yesterday 

Stocks swung between gains and losses after the PPI report confirmed what the CPI report told us on Tuesday…..Inflation is not going away anytime soon….PPI yesterday reported that y/y inflation rates at the producer level came in at 8.7% while y/y PPI Ex food and energy came in at 7.3%.....both in line with the expectations that everyone was prepared for – in fact a bit weaker as supplier appeared to cut prices …… So, stocks took a breather. the S&P only swinging 49 points between high and low for day…. Lots of talk and discussion about what the action on Tuesday meant for investors and portfolios.  Everyone playing Monday morning quarterback -as they tried to point to the causes and then the outcomes.  We are now hearing that more and more FED heads and street analysts are calling for a deeper recession than anticipated with some defining what is to come as a ‘depression’.  Now – That is not good at all.

By the end of the day – the Dow added 30 pts, the S&P up 14 pts, the Nasdaq gained 87 pts, the Russell added 7 pts while the Transports gave up 56 pts.

All the talk of 100 or 125 bps increases in the FED Funds rate next week – seeming to fade – the smart money is betting that the 75-bps hike that we were all prepared for – will in fact come true and so – mkts calmed down a bit. 

The 2 yr. treasury – which is the most sensitive to policy changes – jumped by another 3 bps yesterday on top of the 22 bps it advanced on Tuesday – creating even more of a divide between the 2’s and 10’s suggesting that the recession is marching ahead….as if that is a good thing……and yes, the yield curve remains inverted across all years….2’s. 5’s. & 10’s.

Now many were expecting a snap back rally – but the fact that stocks were not able to ricochet more than they did is causing some disappointment for the bulls……but let us see what today brings.

And today is bringing both Vlad and Xi Xi together in Uzbekistan…..the first time the two have met since the Russian invasion of Ukraine and only weeks ahead of Xi Xi being crowned ‘leader for life’ – Tons of speculation about what that meeting will produce – many saying that Xi Xi will encourage Vlad to reconsider his invasion and find a way to peace, while others are saying that he has no such intention – expect to hear more about that over the day.  In the end – this meeting will not price stocks – but it will keep the chaos alive.

Oil – continues to push higher…. - yesterday piercing its 200 dma trendline as traders assess the outlook for Chinese demand after they began easing up on the lockdown in Chengdu……. Efforts to refill the SPR (Strategic Petroleum Reserve) after Joey has succeeded in draining it – is also on traders’ minds.  Bloomberg reports that discussions about refilling it revolve around crude prices falling below $80/barrel. (So, think support) – This morning WTI is trading at $88/barrel after testing as high as $89.50.  $89.70 is the trendline…so that is a key level to watch…. difficulty getting through that will dictate the next move…failure will keep us in the $83/$89 range while a push up and through will see oil challenge $100 in short order.  

And the action yesterday saw Energy lead the way higher…the XLE up 2.8% was way out in front…followed by Utilities – XLU which were up 0.8%.... continuing the theme that investors are overweighting both those sectors as volatility remains a concern.  Those are the only two sectors out of the 11 major S&P sectors that are positive on the year…. up 47% and 7% respectively.   Real Estate and Basic Materials led the way lower – each falling 1.2% leaving both those sectors down 20% and 17% respectively.

Coal and Nat gas stocks (part of the energy complex) also saw lots of interest…. BTU up 3% while CRK rallied by 8% - bringing both names up 130% and 162% respectively ytd.

Now Gold is at an important crossroad….it pierced $1700 this morning – trading as low as $1694 but has since rallied back – but it is struggling to hold on…. the Dollar index which has been under pressure over the past week – shot higher overnight and is trading at 109.62 – up from last week’s lows of 107.60.  Currency traders are now betting that given the latest inflation data – the FED is not going to slow down on rate hikes anytime soon and that will send the dollar higher -which in the end will put pressure on the commodity complex – as commodities are prices in dollars – so the relationship is inverted…stronger dollar, lower commodity prices, weaker dollar, stronger commodity prices….The dollar high of $110.70 is the level to watch – a breakout there will send the dollar higher and that will put renewed pressure on commodities while a failure there will help them stabilize.

Eco data today – includes a range of reports….Empire Manufacturing of -12.9 – which would be up from -31.3 (positive), Philly Fed Survey of 2.3,  Retail Sales m/m of -0.1%, while Retail Sales ex auto’s and gas of +0.5%, Industrial Production of 0% and Capacity Utilization of 80.2%....remember – a Capacity Util number greater than 80% continues to suggest inflationary pressures – and that would confirm what we learned from the CPI and the PPI.

US futures are up again….as they try to find some stability…. Dow futures up 70, the S&P up 8, the Nasdaq higher by 11 and the Russell up by 2.  The fact that we did not see any significant follow thru after Tuesday’s rout is encouraging, but do not go out and celebrate just yet…. Inflation and the coming earnings remain the dark clouds that hang over the economy and the markets.  And while we got more data on inflation – earnings start the second week of October and that will be the next hurdle for the markets and investors.  Will we see a significant slowdown in reports? What will the C-suite say about the next 6 months…. What effect will higher rates have on consumer psyche?  What about margins…. are they under pressure? (That is rhetorical – of course they are).

You know me - I remain cautious about the coming earnings season….and am being patient…which does not mean I am paralyzed – it just means I am putting money to work in a handful of names that I believe are at the core of a long-term portfolio.  

European markets are up…. French inflation data is due out later today.  The BoE policy meeting which was due today has been put on hold due to the Death of Queen Elizabeth II.  Expect to hear more next week. At 7 am – markets there are up fractionally.

The S&P gained 13 pts leaving it at 3946…. after testing lower on Wednesday than it did on Tuesday…. before recovering slightly.  3946 is KEY…. that is the trendline draw from the lows of June – the S&P needs to hold this line, or it risks testing 3800 ish…. which would set it up to test the June lows of 3650 just as we enter earnings season.

Remember – we are in a seasonally difficult time – September and October remain volatile….and a test lower is still very much a reality.  Stick with the Big, Boring names…. that pay decent divvy’s and take advantage of the lower prices.

Sweet sausage, chicken & sweet vinegar peppers

You will need: Thighs (bone in/skin on), s&p, olive oil, sweet Italian sausage, Vinegar peppers, butter, garlic, white wine, chicken broth, marinated artichoke hearts.  Total time 1 hr... start to finish.

Preheat oven to 375 degrees - Preheat grill for cooking the sausages.

Season chicken pieces with s&p - heat up oil in frying pan - when hot - reduce heat to med/hi - now add chicken and brown on all sides - maybe 10 mins total.  Now remove and place in a baking dish and put in the oven and continue to cook for about 30 mins.

Next - cook the sausage on the grill - careful not to burn.... maybe like 10 mins total.... remove from grill and let rest for 3 or 4 mins then cut into bite size pieces.

In the meantime - add the chopped garlic to frying pan (that still has the juices and oil from chicken) along with sliced vinegar peppers - sauté. Now add the sausage, a bit of butter and some white wine and reduce (5 mins) - next add chicken broth and the artichoke hearts.... sauté for another 5 - 8 mins...
Re-introduce the chicken to the frying pan and allow to simmer for 2 or 3 more mins.
Now serve on a large, warmed platter family style.  Accompany with a large mixed salad and a green vegetable – maybe some sautéed broccolini.