CPI? Was it what we thought? What will JJ say today?

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  • Was the CPI report all that?  Or are there hidden dangers?

  • Today is FED day…will JJ stand tall or will he cave?

  • Stocks rallied – but was it anything other than a bear market rally?

  • Feast of the 7 Fishes – #7 Baked/Broiled Salmon.

It was all very dramatic…..but in the end – it appears to be nothing more than a Bear Market Rally…..accompanied by the year end Santa Claus rally…Ho, Ho, Ho!

So, I’m still a bit stunned at the early morning reaction yesterday….did you catch it?  The anticipation was building all morning….the clock ticking closer and closer to 8:30 am – when the gov’t would report the latest CPI (Consumer Price Index) information… Would it be what we expected (40%), would it be better than we expected (55%) or would it be worse than expected (5%)….Because SO much was dependent on this ONE data point……speculation running rampant – the algo’s prepared for a better than expected result were getting ready to explode – you could feel it….JPM putting out an early morning piece that laid out the odds of 5 possible reactions….it was all very orchestrated……

JPM analysts put out a piece that predicted that a

6 handle on the top line would cause an 8%-10% rally in the S&P,
7% – 7.2% would cause a 4% – 5% rise,
7.2% – 7.4% report would see the S&P advance by 2% – 3%,
7.5% – 7.7% would see stocks fall by 2.5% – 3.5%
while a report of 7.8% + would see the markets fall by 4.5% – 5%. 

They made sure to have all of the media outlets report this ‘call’ – they got everyone very excited…. – Becky Quick of CNBC getting giddy as she reported it at 6 am…(she could hardly control herself).  It was beyond ridiculous, but as the sun moved across the sky – the pressure was building….futures were higher BUT not anything to write home about and then it happened….
The gov’t reported that November CPI only rose 0.1% m/m and 7.1% y/y!  Ex food and energy – the read was +0.2% m/m and 6% y/y….Both reads appearing better than expected and the algo’s went into hyperbolic mode….futures shot higher….suggesting the Dow would open up 800 pts, the S&P +120, You get the picture right? 

And the analysis began….everyone opining on what it meant and what the FED would do now….when the 9:30 bell rang – stocks did just as indicated…and shot higher – the Dow up 700 pts on the opening, the S&P surged by 110 pts to kiss 4100, the Nasdaq advanced by 428 pts….It was almost comical…you’d think the report showed that CPI came in at negative 7.2%!  The conversation suggesting that this would HAVE to cause the FED to stop raising rates now and do what?  PIVOT and cut rates in the summer of 2023!  OMG!

Well, that lasted for all of about 5 mins….and then the indexes started to fall…the Dow Industrials going negative at 12:10 pm while the Dow Transports went negative at 12:50 pm…..…the S&P, Nasdaq and Russell all traded down to the flat line before rising into the bell.  By the end of the day – the Dow added 103 pts or 0.3%, the S&P up 30 pts or 0.7%, the Nasdaq up 113 pts or 1%, the Russell gained 13 pts or 0.7% while the Transports added 11 pts or less than 0.1%.   So, so much for all the drama JPM created….the 7.1% read only caused the S&P to rise by 0.7% – a FAR cry from the 4% – 5% rally they predicted. Even at the high – the indexes only clocked a 2.3% move….And so it was…

While the report did show a decline in some goods, (think used cars) it showed  gains in food (have you been to the grocery store?) and in the services sector – wages specifically and that is the smoking gun….Wages surging in a tight labor market are not going to help the longer term story….leaving the definition of this part of the inflation cycle as ‘cost push’ vs. ‘demand pull’.

You see cost push inflation is the result of rising wages and other costs – that then cause producers to pass on those higher costs to consumers – pushing prices higher….while demand pull inflation is the result of demand exceeding supply of available goods causing producers to take advantage of the demand and raise prices…The first part of this inflationary cycle (April 2021 – August 2021) was demand pull – but now that the ‘supply chains’ have opened up – the rise in prices is now being driven by ‘cost push’ because workers are demanding more money…and as long as that happens….we can expect the services component of CPI to advance…and that is the problem that the FED has to ‘fix’.

And how do they do that?  Bingo – they bring the economy into a slowdown (think recession) causing millions to lose their jobs…so expect to see the unemployment number rise to somewhere between 5% – 6% (currently it is 3.7%).  And remember – not once – in any inflationary cycle going back to the 1950’s has the FED NOT raised rates beyond the rate of inflation…not once… – Fed Funds at 4% are well below the rate of inflation at 7.1%….which means, what?  It means we have a ways to go….so in my opinion – this ain’t over just yet and like they say at the opera – ‘It ain’t over till the fat lady sings’…..

In any event – what I think is interesting is that we saw bigger gains in guess what?  The most beaten up sectors – XLC + 1.7%, XLK + 1.2%,  XLRE + 2.2%, Semi’s (SOXX) + 1.5%, AI (BOTZ) +2.1% and Biotech – XBI + 1.6% – all of these sectors are down more than 25% ytd….so are investors and asset managers positioning themselves for next year? Are they in there buying up the beaten up names ahead of what they expect will be a better year next year?  Which is another interesting conversation because the range of estimates goes from negative returns again to double digit gains….

This morning – US futures are lower…..…Dow futures – 50 pts, the S&P’s -7. The Nasdaq -35 and the Russell is lower by 3 pts.  The sense I am getting now is that investors are reconsidering what JJ is going to say today…..We had a nice rally over the last 2 days….Don’t push it!   

It all happens at 2 pm….with the FOMC announcement…expect to hear rates go up by 50 bps….Not even a question….but as I pointed out yesterday – it will be all about what JJ says at the press conference at 2:30 pm.  After yesterday’s CPI print – expect the ‘journalists’ in the room to try and push him to be more dovish rather than hawkish…a dovish story will always produce higher prices….because it suggests a softening of monetary policy….something that the paparazzi is demanding, but something that would be a mistake in my view.

Like I said and have been saying…JJ needs to stop the insanity – he needs to throw a wet blanket on anyone who expects the FED to pause  earlier than March or  discuss a pivot….…he needs to stay the course and remind everyone that inflation is still running at 7%…well above his 2% target…and while we are seeing some parts of it decline, there are other parts that continue to rise and that is the issue…So – we must stay the course.  I am still in the camp that the Jan/Feb meeting will see another 50 bps hike while March will see a slowdown to 25 bps….and that puts us in the 4.75% – 5.25% terminal rate range by the end of the 1st quarter….exactly where he told us we needed to go before we pause.

Anything less than that (a 25 bps rise in Jan/Feb)  – will be met by buyers….taking the market higher – but risks a return of spiking inflation that will be reminiscent of 1980 – which will box the FED into the corner….…..Just sayin’.  And remember – St. Louis FED President Jimmy B – did raise the terminal rate discussion story to 5%- 7%…. Just so it’s out there in the public square….I hope we don’t have to go there, but they (the FED) did make sure that that is a possibility…..Hopefully – the fact that they said it will help everyone calm down….if not – then not…. In any event – the FED stimulated for way too long….Way to long….so the road out will remain cloudy and volatile.

Expect lots of conversation around the ‘dot plot’ – this will show graphically what the members of the committee think interest rates will be at the end of each year for 3 yrs. out…It will also include a ‘dot’ that represents the ‘terminal rate’, otherwise known as the neutral rate that neither stimulates or restricts economic growth.

Treasuries – nothing new to discuss…..it remains inverted for 7 months now…

Oil?  Which rallied $5 or 7% off the lows of last week ……is higher today…..Up 70 cts at $76.10.  Industry data did reveal that US crude inventories did rise a bit vs. the expectation of a decline and that one little data point is causing the talking heads to scream ‘demand is weakening’!!!  The end of the world is coming….blah, blah, blah…..Neither is happening…Oil remains in the $70/$83 range with an upward bias. 

GOLD – is now trading above the long term resistance at $1819/oz…..As long as it can hold that move – then we could see it test $1900 in short order….Gold is now up 10% off the November low at $1690 as investors look for the safety trade for some of their assets.

This morning European markets are all lower…..….as they await more CPI analysis along with today’s FED announcement and Thursday’s ECB and BoE policy statements….Germany under the most pressure down 0.8% at 6:30 am.  

The S&P closed the day at 4019 after trading as high as 4100…… remember – the trendline is at 4040….and while we pierced it yesterday….let’s see if it keeps a cap on any advance today…again though, it will all depend on WHAT JJ says….will he stay strong or will he cave?  Does he have the backbone to do what needs to happen or will he risk a repeat of history? Only time will tell. 

But in any case – it is what it is….Make your plan, stick to your goals, take advantage of DCA (Dollar Cost Averaging) in your long term account.  Talk to your advisor.

Feast of the 7 fishes – #7 baked/broiled salmon

This one is the easiest of them all. You need only a couple of things – Salmon, Old Bay Seasoning, fresh lemon juice.

Get you salmon – skin on – rinse under cold water… pat dry. Place nicely in a baking dish – season with Old Bay and a squirt of fresh lemon juice. Bake on 400 for 10 – 15 mins… Now Turn from bake to broil and broil the tops for a couple of more mins…

Careful not to burn. Remove and serve. Simple! No fuss, no mess. And when you are making 7 different dishes and need to put them all out at once – this is one of the simpler ones to get done – and it’s always good. 

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