Fed gov Waller throws gas on the fire

• Another Bear Market Rally takes stocks higher.

• Fed Governor Waller throws gas on the fire.

• Oil surges on the back of the Russian Ban – Hello $120.

• Lots of Fed Speak this week and lots of Eco data.

• Try the Soft-Shell Crabs.

Stocks continued the rally on Friday that began earlier in the week - snapping a brutal losing streak that saw the S&P ‘kiss the bear’ – taking that index down 20% if only for a  brief moment….Friday’s economic data helping to boost optimism – the FED’s favored inflation gauge the PCE Deflator  - ‘eased’ in April – going from 6.6% to 6.3%  - something that is still a bit illogical to me –  Why?  Because both PPI and CPI were UP this month yet – the FED’s favored read went down…….and that helped to set the algo’s on fire….and then the Personal Spending report suggested that consumers are spending like drunken sailors – which is interesting – Why?  Because last month – the reading was 1.4% and this month the reading was 0.9% - which is DOWN – yet that’s not how they tried to sell it…. you see the estimate was for a reading of 0.8% so a report that comes in at 0.9% is an INCREASE…. that’s right- try and explain that one.  And on top of that the Personal Income report showed a decline in income, yet spending is up – suggesting that consumers are saving less and spending more…. or worse yet – spending savings.

In any event – Friday saw the indexes put in a good day – the Dow rose by 575 pts or 1.8%, the S&P up 100 pts or 2.5%, the Nasdaq – was the biggest winner because it has been the biggest loser – added 390 pts or 3.3%, the Russell gained 50 pts or 2.7% while the Transports added 300 pts or 2.2%. 
The issue is that the market was in a very oversold -short term position- the pendulum swung too far to the left too quickly – so a snapback ‘bear market rally’ is not surprising.  Fears of the FED tightening are causing all kinds of predictions as to the when the recession will hit and to what extent…..Volatility was up, 10 yr. treasury yields are down (suggesting that money is moving into treasuries for safety), Oil is up (and higher yet again this morning), food prices keep rising while housing appears to be tiring as mortgage rates remain elevated (at least in relation to where they have been).

The recent FED minutes causing confusion among investors – did they say they would remain aggressive no matter what or did they say – that a pause is coming?  Either way - I am not sure I believe that we hit the bottom yet…. I am still in the camp – that the market remains very anxious and will respond swiftly to any changing FED headline.  One day it’s all good, the next day it’s panic…. 

Yesterday, Fed Governor Chris Waller threw more gas on the fire….saying that he sees continued 50 bps interest rate increases for the rest of the year (suggesting NO pause) saying very clearly that ‘he’ supports taking rates past the ‘neutral’ level – which is defined as 2.5%  –  and this brings us back to the St Louis Fed President Bullard comments (3 months ago) that he sees rates going to 3.25% - 3.5% by year end.  (Exactly where FED members - Waller, Mester, Daly, George and Brainard see them), So now you have to ask - which is it?  Is it neutral or is it past neutral? And what does that mean for valuations?  

This morning we are seeing 10 yr. bond yields up 7 bps at 2.81% on the back of the Waller comments.

Volatility declined last week – falling 21% – as stocks rallied – giving pause to the fear that prices would continue to decline.  This morning the VIX is up 3% as the week begins, investors get to parse thru Waller’s comments and the markets anticipate lots of economic data later in the week. Today marks the last trading day for May – so we can expect some window dressing, but not as much as we get at the end of each quarter – when report cards go out. 

Economic data today is all about the housing price index (irrelevant), the Chicago and Dallas Fed Surveys – expected to show 55.1 and 1.5, respectively.  Again – not a huge market mover – but a reflection of what is happening in those parts of the country.  Tomorrow brings us ISM manufacturing PMI report - exp to be 54.5 (down from 55.4) and the JOLTS job openings report – exp of 11.4 million jobs available. We will also get the FED’s Beige book which details economic activity across the 12 Federal Reserve’s regions across the country.  (Again – not a huge market mover – unless of course it catches everyone by surprise – which it doesn’t ever really do). 

Thursday will bring us the ADP employment report where we are expected to see 300k new jobs created, Unit labor costs holding steady at an elevated 11.6%, Factory orders of 0.7% (a decline from last month’s 2.2%) and Durable Goods of +0.4%.  Friday brings us all important monthly Non-Farm Payroll report – and this also expected to show an increase of 325k new jobs created (or I’d rather say restored).  Manufacturing jobs is expected to show a decline of 16k jobs m/m, (39k new jobs vs. last month’s 55k new jobs) unemployment declines to 3.5% while Average Hourly Earnings y/y are up 5.2% y/y down from 5.5% all while inflation is running at 8.5%. (That’s a negative – just fyi).   We will also get the S&P Global US Services PMI – exp of 53.5 and ISM Services PMI of 56.5 down from 57.1.  Both still in expansionary mode – but trending towards neutral – suggesting a slowdown.   
US futures are lower this morning……following the bounce we saw last week.  At 7 am – Dow futures were down 206 pts, the S&P’s off by 28 pts, the Nasdaq lower by 55 pts and the Russell off by 19 pts.  Now – these are minor compared to the rally we saw last week but speaks to the ongoing concern about what story the macro data will cause the FED to tell this week.  The Fed is expected to begin reducing it’s $9 trillion balance sheet starting on Wednesday, NY Fed Pres Johnny Williams, St Louis’s Bullard and Cleveland’s Loretta Mester are all expected to speak later this week.  

This afternoon – Joey is having lunch at the WH with FED Chair JJ Powell…. Would love to be a fly on the wall during that conversation…. expect more to come.

Oil which continues to be on a tear is up 3.2% at $118.60/barrel -after trading as high as $119.42…. recall what I told you last week – once oil broke through resistance at $112.80 it was going straight to $120/barrel.  EU leaders reached a 6th sanctions package against Russia – this will immediately impact 75% of Russian imports to Europe and will see 90% of Russian crude imports banned by year end.  On the back of this move – analysts from JPM are predicting that we could see oil prices rise to $185/barrel.  I guess no relief at the pump this summer.

And natural gas? Yup, that continues to push higher and is now up 130% from the February lows…so, don’t expect AC cooling costs to decline anytime soon either. But don’t worry- the FED’s preferred inflation gauge tells us not to worry – all of these rising prices mean nothing. 

European markets are all a bit lower this morning…. with the exception of the UK – which is up 0.2%. The German EU Harmonized inflation rate came in at +8.7% up significantly from the expected 8%.  French inflation jumped to 5.8% - another all-time high.  Later today they will get ‘flash’ inflation reports from the broader Eurozone.  Investors will be watching for indications and comments from the ECB (European Central Bank) about the pace and scale of interest rate increases that are supposed to begin in July.

The S&P closed at 4158!  A 9% jump in just 7 trading days…. pushing right through resistance at 4100 – which now represents some support.  Official trendline resistance is now at 4276 – so it appears that 4100/4276 is now the range.  But with so much eco data due out this week – remain vigilant.  Anything that suggests that the FED needs to move faster could see us test the May lows of 3800 again.  A level that I think holds but needs to be tested for a 3rd time. 

Soft shell crabs 

The old adage says that you eat soft shell crabs during any month that does not have an "R" in it...Thus - May - August is always a good guide.  There are many ways to prepare them and many different sauces to serve them with.  Today's recipe is simple and always a winner. 

This dish should cost you about $100 for a family of 4.  (Crabs $15/ea., Pinot Grigio Santa Margherita - $25 and the rest is the butter, lemon, capers, milk, flour, and parsley)

For this you will need: The crabs (have the fish guy clean and trim for you) whole milk, flour, s&p, butter, capers, lemon juice and parsley.

Start by rinsing and soaking he crabs in whole milk for about 30 mins.  Then remove and let drain.  Next - season with s&p and then dredge in flour - shake off any excess and set aside. 

In a large nonstick pan - heat up ½ stick of butter When hot - add the crabs – shell side down and brown for 3 – 4 mins.  Flip and repeat.  Remove and set on a plate lined with a paper towel.  Season with a bit of salt. 
Next – in the sauté pan - add in the other ½ stick of butter and melt – let it come to a medium brown color.  Now add the drained capers and the lemon juice (from one lemon) – swirl to combine and then remove from the heat. Stir in the parsley.  Now place the crabs on a serving platter on a bed of arugula (for presentation). Spoon the sauce all over the top and serve immediately. 
Enjoy this with your favorite chilled pinot grigio Santa Margherita.