Markets brace for Fed's rate decision amid investor jitters

• The pressure is on…. what will it be – 25 or 50?

• Mkt is betting on 50, NY Fed President is also betting on 50.

• The WSJ comes out with 2 articles betting on 50.

• Big Banks say it’s irrelevant.

• Try the Rigatoni.

‘Nearly’ everything ticked higher on Monday....as investors, traders and the algos’ await the FED’s next move.... The DOW made a NEW high up 229 pts or 0.6%, the S&P + 7 pts or 0.1%, the Nasdaq was the loser on the day...falling 92 pts or 0.5% as some asset managers take some money out of TECH and put it to work in other sectors...which doesn’t mean anything other than they are diversifying their risk.....because the TECH trade is a crowded trade...just know that...so, if the market does NOT get what it wants – then you can be sure that they will sell TECH hard - in a move to punish JJ....trying to force his hand....And btw – even if they get what they want – my sense is that they will still hit the sell button just not so hard.  The Russell gained 7 pts or 0.3%, the Transports added 112 pts or 0.7% while the Equal Weighted S&P added 47 pts or 0.7% - taking that index to a new high as well.

While the market is pricing in a 100% chance of a 25-bps cut, they are also pricing in a 67% chance of a 50-bps cut....and with yesterday’s WSJ article by Gregg Ip – calling for a mandatory 50 bps cut, you can see why....  Last week it was Nicky T and this week it is Greg Ip....

In fact – Goldman, Morgan Stanley and JPMorgan all came out yesterday and said that ‘the size of the reduction is less relevant for stocks than for the health of the economy’....and this also smells of a 50-bps cut.  Using the words ‘less relevant’ makes it sound like it’s no big deal, that a 50-bps rate cut (should it happen) means absolutely nothing in terms of perception/panic...  They are working hard at trying to prevent the idea of economic weakness if the FED cuts by 50 bps……

Remember –whether it’s 25 or 50, is not the point at this point- whether rates are 4.75%/5% or 5%-5.25% isn’t going to change your cost of living…. lower rates are not changing the price of food, utilities, insurances, taxes, etc. Auto rates might move lower, and mortgage rates might move lower as well, but that hardly changes the picture…because how many times a week are you buying a new car or a new house?

Your revolving credit card rates are not plunging…Currently they are 24.5% (and higher in some cases) – so a 50 bps drop in rates might mean your rate drops to 24.25% months from now…..You don’t think Bloomie’s or Nordstrom’s or AMEX is rushing to drop the rate they charge on revolving credit the moment JJ cuts rates do you? Let’s be clear – they are not.

My guess is that they (the FED) think they have given everyone fair warning, so no one should be surprised or taken back by a 50-bps cut....and what that means is that no one should panic by hitting the SELL button.  OK....so let’s see how that works out…...

The next move in the markets will be caused by what he says about the path and the pace of cuts going forward...which is why – his 2:30 press conference will be important.  That’s where we will learn about what the thinking was behind the Iron Curtain.......how many voted yes and how many voted no and how many sat on the fence.

So, two sectors lost ground yesterday.... Tech - 0.4% and Consumer Discretionary – 0.15%... The other 9 sectors rose...Financials +1.3% stole the show...followed by. Energy +1.15%, Communications +1%, Basic Materials +0.9%, Utilities +0.75%, Healthcare +0.7%, Industrials + 0.5%, Consumer Staples + 0.4%, and Real Estate + 0.35%.   

Stocks continue to go higher because investors are betting on a soft landing, an event that won’t hurt margins, but it won’t actually send prices lower….Again, if you want to see prices come down, I mean really come down, you kind of want to see a mild recession....because if they pull off a soft landing, then prices will never come down...and once the gov’t starts spending money again, it’s only gonna fuel inflation all over again….And BOTH sides are promising to spend more money….But here’s the rub -  one side wants to let you keep more of your money (lower taxes) while the other side wants to take more of your money (higher taxes) while neither side wants to cut back on SPENDING more money.

Bonds also continued to rally….and that sent the TLT up 0.9%, the TLH up 0.7% and it sent the AGG +0.25%.  Leaving bond yields lower - the 2 yr. bond is now yielding 3.54% while the 10 yr. is yielding 3.60%. The 2 yr. bond yield has now fallen by 30% since Memorial Day Weekend…while the 10 yr. has fallen by 22% - clearly betting on a 50-bps rate cut…    Today is the 11th day of a positive yield curve - and still NO recession…. I say this because when the curve went positive – many economist’s/analysts told us it was a precursor to the coming recession…. So, we wait.

Oil pierced $70 yesterday – as it tries to recoup the losses seen over the past 3 months…Last week I told you that I expected oil to test the $72 level (August lows) to see if there was any resistance – and that is what is happening…Overnight oil traded as high at $70.75 before backing off….at 6 am- oil is trading at $69.85…and with European demand weakening and Chinese demand weakening and the possibility of the US weakening, it is hard for me to think there is any catalyst for oil push higher and test the trendline at $74.50.

Gold traded as high at $2617 before settling in at $2608 yesterday. The move up being fueled by the idea that a 50 bps rate cut is coming….So, if we don’t get that, I expect gold to also sell off a bit – taking it back to the $2500/$2525 range and if we get it, I still expect gold to back off to the $2550 range. 

Eco data today includes Retail sales….m/m they are expected to decline by 0.2%, while Ex autos and gas is expected to be up 0.3%.  Industrial Production +0.2% (up from last month’s -0.6%) while Capacity Utilization comes in at 77.9% - no change. Now if retail sales come in below (weaker) than the expectation that all but seals a deal for a 50-bps cut, but if it comes in inline or stronger then it will be hard to make that argument…so sit tight – The answer is coming at 8:30 am.

US futures are rocketing higher again this morning…Dow futures +100 pts, the S&P + 25, the Nasdaq up 117 pts while the Russell is up 8. All as the excitement and jawboning continues…. Jawboning is ‘attempt to put pressure by the force of one’s position of authority’. NY Fed President Billy Dudley (a voting member) has been pushing hard for a 50-bps cut saying that.

 “Monetary policy is tight, when it should be neutral or even easy and a bigger move now makes it easier for the FED to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.”

I though, am holding steady to my prediction of a 25-bps cut only.  I expect the same old commentary…. it’s all about the data…. and right now, the data calls for slow and steady…. So, sit tight. We are about to find out who wins!

European markets are also higher across the board…. Spain out in front at +1.25% while Germany is only up 0.8%.  Remember – after the FED, the BoE meets on Thursday and is expected to cut rates by 25 bps.    

 The S&P closed at 5633 up 7 pts…and appears to want to test the July 16th high of 5667……

Rigatoni in a classic bolognese sauce

You need Olive oil, butter, I cup each of   dice onion, diced celery, diced carrot,

4 cloves of garlic, 1 lb. of ground beef, 1 c of whole milk, ¼ tsp nutmeg, 1 c of white wine – not chardonnay – a pinot grigio works, 1 28 oz can have crushed kitchen ready tomatoes and 2 parmegiana cheese rinds.

Heat some olive oil in a large pot. add the olive oil and butter – once melted add the veggies, season with s&p.  Sauté for about 10 mins. 

Now add the garlic.

After a couple of mins – add the meat, breaking it up with a fork – season with s&p. When it’s all browned – add the cup of milk – turn heat to low and let it simmer – stir it often. You want the milk to be mostly absorbed and cooked out – should be about 15 mins or so.  Add the nutmeg and the wine.  – again, simmer until the wine is absorbed/evaporated. 

Now add the tomatoes and the cheese rinds. – turn the heat up to a slow boil and then immediately turn it down to simmer – leave it uncovered.  Let it simmer for 3 hrs.…. stirring every 10 mins or so.  You can add a splash of water halfway thru.  Season with s&p.  and then remove the rinds. 

Done. 

This is a hearty Bolognese…it is NOT saucy per se.  So do not expect it to be…but it is sooooo good.  Have plenty of grated cheese on the table.