PPI is even hotter than the CPI – Gold trying to stabilize

Someone hit the pause button on Friday….and stocks fell….all as investors, traders and algo’s digested all of the week’s data and then on Friday - the data hit investors upside the head and didn’t help the narrative of lower rates….the all-important PPI – Producer Price Index – inflation at the producer level – rose MORE than expected and MORE than the CPI did on Tuesday.  In addition, it was Friday going into a long weekend – so end of day weakness is not a surprise…. considering everything that is going on – both economically as well as geo-politically.

At 4 pm – on Friday – the Dow lost 145 pts or 0.4%, the S&P down 25 pts or 0.5%, the Nasdaq gave back 130 pts or 0.8%, the Russell lost 28 pts or 1.4%, the Transports gave up 278 pts or 1.7% while the Equal Weighted S&P lost 30 pts or 0.5%. 

So, at 8:30 am on Friday we got the PPI and it was HOT….PPI final demand m/m up 0.3% (vs. the expected 0.1%) and Final Demand y/y rose by 0.9% (vs. the expected 0.6%)…..PPI Ex food & energy m/m rose 0.5% (expected 0.1%) and y/y was up 2% (vs. the expected 1.6%)…and all that did was confirm that inflation is not dead yet….and may remain sticky for a while longer and that means that the FED is going to be hard pressed to convince us or the markets that they NEED to cut rates.  

And remember – PPI leads the CPI – so higher prices at that level – weave their way down to the CPI over a period of 4 – 6 weeks…so what that says is – the next CPI report (due out on March 12th) and the one after that due out on April 10th  will most likely be higher as well….  So, tell me again why or how JJ can explain away the need for lower rates?

On the other side – we got Housing Starts and they plummeted – falling 14.8% m/m all while Building Permits – which were expected to gain 1.3% - fell by 1.5%.....so overall the data suggests a mixed picture…..remember – housing is directly sensitive to mortgage rates and those rates have crept higher again….currently in the 7.25% range for someone with a 740 fico score or higher…  Home Builders fell by 1.2% on the back of this news…

Bond prices tumbled as well as the eco data only confirms higher for longer…….the TLT and TLH both down 0.5% - leaving these bond ETF’s down 6.2% and 4.9% respectively….2 yr. yields are now 4.61%, 10 yr. yields are pushing 4.27%....both still well below the levels seen in October – when both pierced 5%.....but with the ongoing fight with inflation and the need for Janet (Treasury Secretary Yellen) to fund the deficit – it is sure to be a challenging environment for stocks…….Remember – as she brings more supply to the market that will put pressure on prices and lower bond prices means higher yields… and if we continue to push prices lower then yields will be kissing 5% before you know it…..Capisce?

And so, what did we see?  We saw the most interest rate sensitive sectors get punched…..think Real Estate – XLRE – 1%, Tech – XLK – 1%, Disruptive Tech – ARKK – 2.5%, Semi’s -SOXX – 0.6%, Expanded Tech – IGV – 1.7%, Home Builders – XHB – 1.2%, but we also saw this year’s best performing sectors also come under pressure…….Communications – XLC which was up 10% yd – gave up 1.6%, Airlines – JETS which was up 6.3% lost 1.1%, the Growth Trade – SPYG which was up 8.5% ytd gave back 0.6%.  And then the general weakness in the broader market saw Industrials – 0.6%, Financials -0.3%, Consumer Discretionary – 0.6%, Retail – 0.5% and Regional Banks – KRE – 1%. 

And so, where did we see money move to?  Healthcare – XLV + 0.4%, Consumer Staples – XLP + 0.15%, and Basic Materials – XLB + 0.5%. ‘*Note – Healthcare which was an underperformer last year at +1% is one of this year’s winners – up 6.8% as of this morning.   

So far this year – here is how the year is playing so far…. Communications + 8.6%, Healthcare +6.8%, Financials +5.4%, Tech +5.25%, Industrials +3.5% Energy +2%, Consumer Staples + 1.7%, Consumer Discretionary + 0.1%, Basic Materials -0.4%, Utilities – 3.3% and Real Estate – 4.3%.

Eco data today includes the Philly Non-Manufacturing Index – (think services) and remember – we are a services economy….so this is kind of an important indicator… Wednesday – we are due to get the January FOMC mins… Thursday we will get Chicago Fed Activity, Initial Jobless Claims, Cont. Claims, and both Manufacturing and Services – PMI’s – which are both expected to remain in expansionary territory.  We will also get Existing Home Sales – which are supposed to by up 5% (but remember last month they plunged by 14.8%) – so a bounce is expected…. but remember – mortgage rates are higher than they were 3 weeks ago…. Let’s see.

Oil rallied on Friday closing at $79.20/barrel. This morning it tested $79.75 and is now trading at $78.88…. the latest strength in oil coming from the ongoing disruption created by the Houthis on Friday – when they attacked another commercial vessel in the Red Sea – forcing (for the first time) an evacuation of the ship.  This along with the ongoing strikes on US assets by the Iranian back Houthis will keep tensions high amid the prospect of a wider conflict in the Mid-east.  Transit via the Suez Canal (Red Sea) has come to a near standstill as risk rises and while it is not completely closed down – any increase in attacks only raises the risk of a shutdown and that will further disrupt commerce and shipping rates as container ships are forced to go around Cape Horn vs. thru the canal.  So, expect the price of oil to remain elevated….

We have now pierced the January high of $79.30 leaving many oil analysts to suggest the next stop is $85/barrel – a level last seen in October. 

Gold – which tested $2000 last week after the hotter than expected CPI – has tried to stabilize and rally back just a bit. This morning it is up $13 at $2,037/oz as gold traders wait to dissect the FOMC mins tomorrow.  But what do they really expect they are going to find out?  Are the mins going to contradict what the FED heads have been saying?  Doubtful…. which is why I think it’s a bit toppy here…Gold now remains in the $2000/$2,050 trading range.

Earnings today include HD (they beat- but had some weakness in same store sales) and the stock is down 12 pts or 3.1% in the pre-mkt… of course it is…. did you see what they did going into the report…?  It is up 7.6% since January….

WMT reports and they beat as well…. e-commerce sales ‘soar’ $1.80 vs. $1.65…. Better forward guidance, raising the dividend by 9% to 0.83/sh. They are also buying Vizio (TV’s) for $11.50/sh (Friday’s close was $9.53/sh) 20% premium….

And speaking of takeovers…Capital One Financial is buying Discover Card for $35 billion……creating a ‘consumer colossus’…..COF is trading down 7 pts at $130.50 while DFS is quoted up $15 at 125/sh…… Vanguard, Capital Group, Blackrock and State Street the 4 biggest holders of DFS…..and they are also the 4 biggest holders of COF –  So they lose $7 on one position but gain $15 on the other!  So net, net – they are up $8 on the whole position!

US futures are lower this morning…Dow futures – 151 pts, S&P’s -16, the Nasdaq down 84 pts and the Russel is down 15 pts.  While the earnings today are all very exciting….- it will be tomorrow’s NVDA report that drives the overall tone of the market…..Now look – NVDA is up 46% this year…(that’s 7 weeks), it is priced to perfection – so in my opinion – the stocks can only go down on the report…..no matter what they report – unless of course they tell us something that is completely unknown to the markets (stock split???) and while I expect they to blow the doors and roof off the house – I also expect the trader types will sell it and the large asset managers will ‘peel some off’ as well to lock in those astronomical gains….which doesn’t mean the game is over…it’s just trading and risk management……

European markets are slightly higher this morning…. Barclay’s up 5% as they announce an overhaul and substantial cost cuts…. other than that – no real eco data to drive the action…markets across the region are up between 0.05% (Eurostoxx) - 1.8%. (Germany).

The S&P closed at 5005 – down 25 pts…. which makes complete sense – since the latest inflation report does not support the rate cut narrative…And with Treasury yields now pushing multi-year highs and likely going higher still, the pressure is on equities…   But for now – the economy and the markets have shown little signs of stress – which only continues to support the no rate cut narrative…...Let’s see if tomorrow’s FOMC mins reveals something that we don’t already know – don’t bet on it.  In the end – I think we have topped out for now…and expect some churn and a pullback into the end of the qtr.…. Trendline support is at 4813 – which is a 4% move lower from here…No one should be surprised if we test that level. 

Pan roasted chicken with dijon wine sauce

For this you need:

1 whole chicken, cut into parts, Olive oil, Salt & pepper, White wine, Shallots, minced, Fresh rosemary, chopped, 1 tbsp Dijon mustard.

Preheat oven to 450 degrees.

In a heavy-bottomed – oven proof skillet heat olive oil on high heat until it shimmers.  Turn burner down to medium-high and cook chicken in batches, being careful not to overcrowd the pan, six minutes on each side until chicken is browned all over. Once every piece has been cooked, put it all back in the pan and put in the hot oven for 20 minutes.

Remove and reserve chicken. Put skillet back on stove on medium heat. Add shallots, additional rosemary and white wine for a sauce. Let mixture come to a boil and whisk in Dijon mustard and let cook for 5-7 minutes. Add chicken back to pan and let it heat through with the sauce on it. Once heated, serve with sautéed spinach or broccoli.