Inflation is rearing it's ugly head

• Inflation is rearing its ugly head (again).

• PPI is HOT, HOT, HOT.

• 6 month and 1 yr. T-Bills pierce 5%.

• Stocks fall on hawkish comments by Bullard and Mester.

• Dollar rises, putting pressure on commodities.

• Try the Grilled Lamb Chops.

January Producer Prices come in Hot Hot Hot!!!   Supplier prices m/m rose by 0.7% in January – the biggest gain since last summer……The expectation was for +0.4%......Ex food and energy of +0.5% - again hotter than the expectation…and the y/y number?  Oh boy……that rose by 6% - when the expectation was for 5.2% and Ex food and energy of 4.5% vs. the 4% expectation….on top of that Initial Jobless Claims show no signs of cooling – which suggests that we can’t possibly get a recession if the labor market remains this strong….and that caused stocks to try to stabilize.  The weak start  turned quite positive by noon time….stocks were up, and up nicely -  as investors appeared to be taking it in stride……and then at about 3 pm….we heard from St. Louis Jimmy B…..a fairly strong voice at the FED but also NOT a voting member this year…..when he mimicked Loretta’s commentary…..saying that a 50 bps hike is probably needed and should have happened in January……Leaving the market to assume that they will now push for a more aggressive hike in March…and that sent stocks careening into the close.

The Dow lost 435 pts or 1.3%, the S&P off 57 at 1.4%, the Nasdaq gave back 215 pts or 1.8%, the Russell lost 18 pts or 1% and the Transports gave up 190 pts or 1.2%. 

Look – I’ve said it here for weeks now……Traders and algo’s have taken stocks higher – they got well ahead of themselves…as so many talking heads convinced us that that not only are we not going into a recession – (never mind that the yield curve inversion has been going on for 10 months now) – but that we are going to have a soft landing as well – that the FED can navigate this…  All while members of the FED started to float the idea of the terminal rate being somewhere in the 5.5% - 6% range (up from the 4.75% - 5%)….you see, they tossed out the 6 number – they put it out there so that they can point to it, when they take it there…and this caused fed fund futures traders to reprice the bet – moving from 4.9% to 5.2% - still below what the FED has been indicating…..Bond traders reminding us that the bond market would lead the stock market and that the bond market was NOT predicting any such thing – and so the tug of war continued.

After the stronger inflation data this week – both CPI and now PPI – that narrative has to change and that’s what started to happen yesterday…….Stocks need to reprice based on this latest data…and will continue to reprice as the conversation matures…..Look – I have been saying that while inflation was trending lower – I was afraid that it was going to rear its ugly head again if the FED eased up….and they did ease up – they went from 75 bps moves to 25 bps moves…still up but less aggressively….and while I would rather NOT see rates rise – the fact is they are going up because inflation has become sticky in places that won’t necessarily respond until rates are high enough to break it….and 4.25% - 4.5% is doing it….4.75% - 5% isn’t doing it, 5% - 5.25% isn’t doing it.

Remember – this is exactly what happened during the last century – 1979 – 1981 to be specific….we had really sticky inflation, we had rising wages which forced prices higher in what would become ‘wage/price’ inflation….we saw inflation trend lower until it didn’t and when it turned up again and it turned up with a vengeance - Unemployment went to 10% while inflation surged to 13% forcing  FED Chair Volker to do the unthinkable……he took rates to 21% to ‘break it’…..and break it he did…..the country went into a 2 yr. deep recession….the market got crushed, housing got crushed, and money market funds were the investment of choice – since all you had to do was put your money in a CD and you were earning 21% GUARANTEED – sleep at night, no stress, nothing to worry about…. $100,000 turned into $121,000 in 12 months with no stress – it was magic…and $500,000 turned into $605,000 – you get the picture, right?  Do the math….The question was – Why would anyone put money into stocks in that environment…and the answer is – they didn’t.

10 yr. treasuries were yielding 13.01% in 1980, 2 yr. Treasuries were yielding 15.3%, 1 yr. CD’s were yielding 20+%.   The economy was UGLY…..just ask any baby boomer  (1945/1965 is) or anyone from the ‘silent generation’ defined by people born between 1930/1945.  You see all of you Gen X’s, Millennials or Gen Z’r don’t understand it – you can’t, it’s not your fault, you didn’t live it….so pay attention when someone that did tells you what it was like…. Now, I am not suggesting that that is where the Fed is going, but I am suggesting that no one should be surprised if rates continue to go up…because historically – even 6%  would be considered ‘normal’….which is a shock to all of you that only know 0% for savings rates and 3% mortgages.

And yesterday – treasuries prices declined sending yields up - the 3 month is yielding 4.88%, the 6 month 5.001%, the 1 yr. is yielding 5.005%,  2 yr. at 4.7% and the 10 yr. at 3.9%....Current S&P dividend yield is just 2% (maybe a bit less) with lots of short term risk….so now you ask – Why did stocks go down? 

Look – the idea that the FED is gonna pause and then pivot has to stop….- pause maybe in June, Pivot – not happening….how can they?  Pivoting would suggest the economy needs stimulation….who here thinks the economy is so weak that it needs the FED to stimulate?  Anyone?  Look – there is light at the end of the tunnel for sure – but you have to be in it to win it….and that might mean some weakness in the weeks and months ahead….but that will also be the opportunity for smart investors that stick to the plan.

Now yesterday saw all the S&P sectors decline….and guess what – the sectors that have outperformed so far this year are the ones that got walloped….Tech down 1.8%, Communications down 1.5%, Consumer Discretionary – 2.2%, Airlines – 1.8%, Semi’s down 2.5%, AI – 1.6%, Disruptive Tech – 2.5%,  Housing – 1.7%, Retail – 1.6%...The value trade lost 1.2% while the growth trade gave back 1.5%. 

The contra trades did well… PSQ + 2%, SH + 1.5% and the DOG + 1.3%.  The VIXY gained 5.25%....(that’s the fear index).

Oil was weaker yesterday – down 0.6% and is nosediving today – down 2.5% at $76.50…….the buildup in crude inventories, warmer winter weather, a stronger dollar,  along with a more aggressive FED are responsible for this latest move lower. But I’m good with it right here….The Saudi’s are not going to let it collapse and China is expected to soak up all the supply….and then we will move from winter to spring/summer and the driving season heats up again…..it’s all cyclical….don’t stress, oil is not collapsing….there is way to much demand.  It needs to break up and thru $80 in order to see a sustained move higher….right now we remain in the $74/$80 range.

And the dollar index – DXY moved up yesterday on the back of a more aggressive FED….you see – higher rates in the US will cause investors (both foreign and domestic) to buy the dollar and as the dollar surges, expect pressure on commodities – since they are price in dollars and it has an inverse relationship.

As such – Gold is also under pressure….(strong dollar) falling $20 at $1883/oz. Support is at $1800 – if the dollar continues to move up, then  I would expect gold to test the trendline support….I would also expect it to hold – unless the FED narrative goes beyond 6%....So – sit tight.

US futures are down this morning as investors/traders/algo’s continue to digest the latest report….Dow futures -170, S&P’s -30, the Nasdaq down 120 while the Russell is down 15.   Eco data today includes nothing that will drive the action…..but next week we will get Manufacturing PMI, Services PMI, Existing Home Sales, the FOMC mins from January, 1st revision to 4th qtr. GDP (no change), Personal Income and Personal Spending AND the FED’s favored inflation guide – the PCE Deflator…and after what we heard this week – expect this one report to be the data point that everyone focuses on.

European markets are all down more than 1% as investors digest everything that went on this week as they reassess risk.  German Producer Prices rose more than expected up 17.8% y/y vs. the expected 16.8%.  while inflation is running at 8.7%.   

The S&P closed the day at 4090 – down 57 pts and on the low of the day…which usually means we test lower today…and if futures hold true, then yes, we will test lower at least on the opening.  Richmond Fed Pres – Tommy Barkin and Fed Governor Mishy Bowman are both due to speak today.  What will they say?  How will they soothe the market?  Can they soothe the market?    Look, it is Friday and the data is an eye opener….so I would not be surprised to see us end the day lower….If the S&P is a good predictor – then it should open at about 4060 on way to test support at 4000….something I have been saying for a while now. 

With the 6 month and 1 yr. T-bills yielding more than 5% this morning….I would expect to see short duration cash go into those assets before much of it goes into stocks…but the lesson here is- don’t try to time the market….that’s a losing game…it’s time in the market with the names that will weather the storm.   Call me to discuss.

Grilled lamb chops with orange butter

This is a favorite….

Orange/ Cilantro Butter - easy to make and very versatile on many meats. Now like any herb butter - this is simple to make.... You will need - 1 stick of butter, fresh minced cilantro, ground coriander, orange zest, s&p.

You can make the butter ahead of time and put in the freezer so that it is ready to use and always have some for a later time.  It never hurts to make them and have them available to you in a flash.... Remember - herbed butters are your creation - make what you like. Try different combinations of herbs to arrive at a new favorite.

Let the butter rest on the counter for about 1 hr. so that it softens. Do not melt the butter in the microwave or on the stove - you do not want to cook the butter - capisce?  

In a bowl - add the butter, minced cilantro (like 3 tblsp), a dash of coriander and about 1 tsp of orange zest - mix well - now season with s&p... cover and refrigerate for about 20 mins.  Now remove the mixture from the fridge and place in wax paper - now ever so gently - form into a log - wrap in saran wrap and put in the freezer so that it hardens up.

Preheat the grill -

Brush your chops with a bit of olive oil and then season with s&p.  - a nice thick cut chop on the grill works well with this.

Now place the chops on the grill - careful not burn.  Should be about 5 / 8 mins on each side depending on thickness - you want a nice pink center.  Remove from the grill, cover and let rest for 3 mins or so.  Now place on a warmed plate and top with a slice of the Orange/Cilantro butter.  Serve this with a wild grain rice and a green veggie.   Enjoy with a nice Pinot Noir.