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PPI causes the algorithms to run at full speed.
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Rally in stocks and bonds.
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We are waiting for this morning’s CPI report.
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Oil price is faltering – demand in China is slowing, while demand in the US is strong.
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The price of gold remains above $2,500.
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Try the Risotto All’ Amarone.
And BAM! Stocks rose; bonds rose, leading to falling yields after the government released a “cooler” than expected PPI report – reinforcing the notion that there is now NO reason for the Fed not to cut rates in September. Swap traders are now pricing in – wow, wow – a 40 basis point cut in September, with another 65 basis points of cuts split between November and December – a total of 105 basis points when the ball drops in Times Square – which will take rates to 3.95%-4.2% – (they are currently 5%-5.25%).
Look – the impression is that the Fed has succeeded in reducing inflation, but now to “guarantee” we don’t get out of control they need to cut aggressively… (an idea I disagree with)… In my opinion, aggressively cutting rates says something is wrong… and sends a different message, and by the way, this week alone we’ve heard from three Fed Chairs that they are “remaining cautious” on rate cuts… which to me does not mean that the “team” is ready to make a “huge rate cut”. And again – whether it’s 25 or 50 basis points – is it really going to change the fact that prices for the things we need on a daily basis are still rising? Let me answer that question – NO.
And investors/traders and algos were excited… which is a big change from their sentiment last week – when they claimed the world was falling apart! As Bloomberg tells us – “The S&P 500 posts the biggest 4-day rise this year!”
The Dow gained 410 points, or 1%, the S&P rose 90 points, or 1.7%, the Nasdaq exploded, rising 407 points, or 2.4% (again thanks to Mag 7), the Russell rose 34 points, or 1.6%, the Trans gained 152 points, or 1%, while the Equal Weight S&P gained 78 points, or 1.2%.
The TLT ETF (20-year bond proxy) rose 0.8%, while the TLH ETF (10-20-year bond proxy) rose 0.7% – the 2-year yield was 3.93%, down 7 basis points, and the 10-year yield was 3.84%, down 6 basis points. The AGG (Aggregate Bond Index – which includes all U.S. investment grade bonds – Treasuries, corporate bonds, MBS, ABS and CMBS) rose 0.4%.
And all this happened just 24 hours before we got another important inflation data due out in 3 hours now…the CPI report for July – which details inflation at the consumer level…remember the PPI details the cost of goods at the producer level…and as that cools, one would expect the CPI to cool as well, as prices FLOW down from the PPI to the CPI…Capisce?
While the Producer Price Index (PPI) showed a cooling off, today’s Consumer Price Index (CPI) estimates are actually just a little higher… CPI m/m is expected to be +0.2% (up from -0.1%), excluding food and energy at +0.2% (up from +0.1%). CPI y/y is expected to be 3% (unchanged mom) and excluding food and energy at 3.2%, up from 3.3% the previous month… So at first glance, it looks like a mixed report, actually showing a slight increase in prices m/m – but a cooling off y/y… but I have a feeling that after yesterday’s reaction – even if it turns out as expected – they will ignore any negative impact because they’ve already made up their minds… JJ needs to cut rates!
But remember – the Fed has two mandates – price stability and full employment. And now that inflation appears to be cooling down – although I have not seen any easing in the prices of the things you and I need on a daily basis – it can focus its efforts on the labor market – which is also showing signs of slowing – which is something the Fed doesn’t really want to do right now… – So the assumption is that a weakening labor market requires lower interest rates to support the labor market recovery… But you see, here lies the problem… lower interest rates could stimulate demand, which in turn will cause inflation to flare up again… so it’s a fine line that it has to walk… Stay tuned…
Yesterday we heard from another Fed chief who caused even more confusion… – Raffi Bostic of Atlanta – and he said he continues to “look for a little more data before supporting a rate cut,” although he is confident they will be cut by year’s end. He comes after Kammy – sounds like word salad to me… Listen, stop with the nuances – either cut or not, but stop with the word salad. We’ll hear from Alberto Musalem and Patty Harker of the Fed on Thursday and Austan Goolsbee of Chicago on Friday.
I just have to say this: When I got into this business in 1980, the Fed never did what they do today. They never talked to the press, they never asked you to lie on the couch, take a Xanax and ask if you were OK. They came out from behind the curtain and told us their decision and boom, the market had to figure it out. They didn’t send every member out to discuss what they thought or what might happen. They said NOTHING. And in some ways that was better because it separated the “men from the boys” and the “women from the girls” (politically correct). Just ask anyone who was there back then.
Oil prices, which had risen above $80 on Monday, fell a bit yesterday to end the day at $78.35, citing the same old story of weaker demand in China and its turn to “clean energy” as the reason for the oil price drop. OK, you can believe that. This morning, the API reported that U.S. crude oil inventories fell by 5.2 million barrels and gasoline inventories fell by 3.7 million barrels, suggesting that demand in that country remains strong. As a result, oil prices are up 20 cents to close at $78.55. The EIA is expected to release its findings later this morning.
Oil markets are also waiting for Iran’s next move against Israel after the country “announced a tough response to the assassination of a Hamas leader last month.” This comes as Iran holds military exercises in the Caspian Sea and the US sends warships and a submarine to the Middle East.
Gold has now entered a new century… $2,500. The rise is partly due to the falling dollar, meaning lower interest rates, and partly due to investors looking for “safe” investments in times of crisis… and a bit of stress. This morning gold is trading $3 higher, at $2,510.
US futures are in turmoil… Dow -12, S&P up 1, Nasdaq unchanged and Russell up 5 points. All this while we wait for today’s 8:30am report on the status of the latest CPI report. GOOG is making headlines, down 1% after the Justice Department said it was considering a breakup!
European markets are all up… about 0.3% overall. UK inflation rose 2.2%, below the 2.3% estimate. Services inflation rose 5.2%, below the 5.7% estimate.
The S&P closed at 5434, 90 points higher…putting us right at short-term trendline resistance at 5451. Yesterday I said I thought this would provide some resistance, but after yesterday’s rise we could go right up and beyond if today’s CPI is better than expected. Watch what futures do at 8:30:30 seconds…If they like what they hear we’ll break that and more on the open…leaving the early August high of 5566 in the bull eye. Remember what I said…many market participants are away from their desks – enjoying the last days of summer…so moves can and will be overdone (in either direction).
Bottom line: Trust your portfolio, leverage your advantages where it makes sense, while building some defensive positions. Make sure you know what you own, and talk to your advisor if you have any concerns at times like these.
Risotto all’amarone
This is one of my favorites and comes from the Puglia region of Italy. This region represents the heel of the boot – halfway up the calf. It is located on the east coast of Italy on the Adriatic Sea.
You will need: Vialone Nano rice – similar to Carnaroli but makes a creamier, more delicious risotto, Monte Veronese fresh cheese – this cheese is made from cow’s milk and produced in the north of Verona. It is considered one of the best cheeses of the Lessini mountains.
You will also need: finely chopped onions, butter, beef marrow, cold pressed olive oil, beef broth and half a bottle of Amarone della Valpolicella.
Start by heating the Amarone. Do not boil, just heat slowly.
Bring the beef broth to a boil and then reduce to a simmer.
In a separate pan, heat the butter, bone marrow and a little olive oil and fry the onion. When the onion is golden brown, add the rice, stir and fry on the heat for several minutes. Season with salt and pepper. Slowly add the Amarone – stirring constantly so that it is absorbed by the rice.
Finally, add the hot beef broth, one ladle at a time. When it is absorbed, add another ladle, stirring with a wooden spoon. Taste and adjust seasoning. Cook until the rice has absorbed all the broth and the grains retain their consistency – do not cook so long that it becomes mushy. Turn off the heat; add a dollop of butter and the grated Monte Veronese cheese.
Serve immediately in preheated bowls. It doesn’t get any better than this!
