It’s all about Powell – What he says is more important than what he does

• It’s all about JJ – What he says is more important than what he does.

• Will he hint at hiking the target inflation rate?

• Will he suggest we are at the peak?

• What words will he delete from the narrative?

• UK inflation unexpectedly FALLS – Will the BoE pause?

• Try the Eggplant Caponata.

Well, it happened again….Stocks fell, bond prices fell, yields went up, oil rose and gold fell, as investors continue to speculate not about what the FED will do today, but rather what they will SAY today and what they will say is ‘Don’t make assumptions about what YOU think is next’ and this suggests that they are NOT closing the door on future hikes….no matter how much the trader types stamp their feet.……

The Dow lost 106 pts or 0.3%, the S&P lost 10 or 0.2%, the Nasdaq fell 32 pts or 0.2% the Russell gave back 8 pts or 0.4% and the Transports lost 90 pts or 0.6%.  The 2 yr. yield rose to 5.109% - up from 5.06% - while the 10 yr. bond yield rose to 4.36% up from 4.31%.  Oil ended the day up small at $91.59 – after testing as high as $93.70 while Gold finished the day at $1952.   

As noted – rates are not going up today, but the FED will have plenty to say about where it thinks we are…..they will report on not only interest rates, but will also release their quarterly thoughts about GDP, Inflation and unemployment – (known as the Summary of Economic Projections – SEP).  The key metric will be the famous Dot Plot that the FOMC members create anonymously….and that lays out what the members expect rates to be in the short term and the long term….

Ok – so on interest rates – there is no surprise…. (today),  but what about the Dot plot?  Street analysts expect an upward bias over the next 6 months as the Fed continues to deal with sticky inflation and a strong labor market….but the longer run dot that projects beyond 2026 is the wild card….(first of all – I’m not really sure if it makes any sense at all to try and predict where rates will be 4 yrs. out….While I understand that they want to appear as if they are in control – let’s be honest – can a 4 yr. forward prediction in inflation be accurate?)  NO, it cannot, but it is the game they play.  Now in June – that metric came in at 2.5% - the concern today is – What will that number look like now?  Why?  Because it could reveal what I have thought might happen all along….an increase in this data point suggests that the FED may raise their inflation target from 2% to something closer to 3%.  My friend Joe Brusuelas – Chief Economist at RSM puts it this way.

“Should that shift higher, even by a quarter percentage point, which could be a tacit signal that the FED will be content to let inflation run higher than its 2% target and possibly rattle markets.  We’re laying the groundwork to prepare our clients for the inflation targets we think will be going up.”

And there it is…. expect the FED to raise their comfort level on long term inflation rates at some point…. The question:  Will today be the day they float that balloon and if it is – how will investors react?

Now what is interesting with all of these quarterly data points and projections is that the FOMC members are usually wrong when they try to predict inflation and GDP growth that far out, which leads to sudden policy shifts that have the potential to throw the markets off balance so again – why do it? Stick to the closer data points and worry more about what you can control vs. what you can’t. 

The next thing to pay attention to today will be the press conference – where reporters will be comparing prior statements to today’s statements…. What words will they delete from the statement? And while you’re laughing right now – do not discount the importance of what those deletions suggest about the mindset behind the iron curtain…..So for instance – at the last press conference – JJ said that ‘the committee remains highly attentive to inflation risks’, well what if he says today that ‘the committee remains attentive to inflation risks’ (delete highly)….that would suggest that they are MORE comfortable with where inflation is going….think less concerned about it rearing its ugly head and if that’s the case – that might suggest that the rate hike cycle is over…  Fed Fund futures are now placing only a 30% chance of a November hike and that is down from 50% last week.  If JJ challenges that idea it could cause more volatility in the markets.

Ellen Zentner – Chief Economist at Morgan Stanley put it this way –

“We (Morgan) do believe that the FED is done here, they just don’t know it yet.”

So, JJ – which is it?  Are you done or not?

So then, the issue is OK, then how long does the FED expect to hold them right here because that will be the next projection by the markets…and you know that the market expects a May 2024 cut in rates – Let’s see if that changes after the presser.

This morning futures are ticking up – which should not be a huge surprise after the weakness we have seen…. Dow futures + 60, S&P’s +7, Nasdaq +25 and the Russell is up 6 pts. It will be interesting to see how JJ confronts rising oil prices as they do present an issue for the inflation story……For those of you not old enough to remember – it was the surging oil prices that sent the US economy into a deep recession during the 1970’s  - as well as the early 80’s and even the 90’s.  I guess Joey is expecting Iran to come to the rescue and challenge OPEC…. That’s interesting, isn’t it?

Overnight we learned that inflation in the UK unexpectedly FELL in August – even as oil prices rose….  UK inflation came in at +6.7% down from 7% y/y and they rose 0.3% m/m vs the expected +0.7%.  As you can imagine, this caught investors off guard and is now causing all kinds of commentary about how the BoE is about to pause on rate hikes tomorrow when they announce their intentions….recall – the smart money was betting on a 25 bps hike…but after today’s ‘better’ data – that assumption is now front and center.  Where was the weakness?  FOOD of all places….and that news is sending the UK market up 0.7% and that is pulling the rest of them higher as well.   France the weakest performer up 0.3% with Italy out front up 1%.

And it is that data point that reversed US futures – which had been lower overnight, but when the UK data came out– futures turned up – not dramatically – but they did turn up. 

Oil is trading down $1 at $90.25; Gold is trading down $1 at $1952, and the 2 yr. and 10 yr. Treasury yields are backing off a bit…. The 2 yr. now yields 5.066% and the 10 yr. at 4.34%.

The S&P ended the day at 4443 down 10 pts…..…Trendline resistance is at 4483…..which is up ~ 1% from here…..Now, if JJ suggests that the FED is done and we can take future hikes off the table – then I would expect a monster rally, barring that I think we churn – because I do not think he is done….….. Now the other issue on the table that is presenting a problem in DC is the potential gov’t shutdown that is only days away….but that is all about the drama of elected officials……that is not a market dynamic that will send markets up or down significantly……it will add to the drama on the stage, but will not be pricing stocks.  Will the gov’t shut down?  Who knows – it appears that Kevin McCarthy is losing control over his party…. Let’s hope not….…what I’m telling you is do not go making investment decisions around what those clowns do on Capitol Hill.  

And yes – the UAW is still striking…..Shaun Fain turning up the heat – if no movement by Friday at 12 noon, then more local union members will walk…and the workers are digging in as well…Shaun tells them to ‘have faith’ and like a heard of sheep they are all falling in line…. Recall my wage increase conversation yesterday…. Fain wants a 36% hike in wages for a 32-hour work week – which translates into a 70% hike…. 

Sit tight…. there is a lot happening…. but today is all about JJ.

The quarter is coming toa close - Expect to see some repositioning among asset managers…. selling some of the big winners and adding to the underperformers as we move into yr. end and the new year.

Eggplant caponata

This is a Sicilian version of the French Ratatouille - is a great dish and is used mostly as an appetizer – some people use it as a side dish or even toss it over pasta – but I only remember the way my grandmother made and served it – and that was in a bowl at room temp with  a freshly sliced baguette.

For this you need:  1 lg eggplant with some of the purple skin removed, olive oil, chopped celery, chopped Vidalia onion,  sliced red pepper,  smashed/chopped garlic, 1 can of plum tomatoes- hand crushed, Green olives (pitted) and rough chopped, capers (drained/not rinsed), 1 tlbs of tomato paste, some oregano, s&p to taste.  (Optional ½ cup of yellow raisins). 

You will also need ½ c of red wine vinegar, 2 tblsp of water and 2 tblsps of white sugar.

Begin by cutting the eggplant into bite sized cubes – place in a colander and sprinkle with salt – let it drain for 30 mins.   Next – heat up a large skillet with olive oil – add the eggplant and stir well – turning them so that they cook evenly on all sides…now the eggplant sucks up the oil – so you may have to add a bit more as you cook the eggplants…..go ahead, but don’t drown it.  Remove the eggplant and place on a clean plate and set aside.

Now add the onions red peppers and sauté until soft (If you need more oil – go ahead) – maybe 8 – 10 mins…. remove and place on a separate plate.  Now sauté the celery – and cook until a bit soft. (Again, if you need a bit more oil – go ahead).  Now combine the celery, onions, and peppers – stir in the chopped green olives and the capers.  Taste and season with s&p and oregano.   Now add the hand crushed plum tomatoes and the tomato paste.  Allow it all to blend – as you cook over med high heat.  Careful not to let it burn.  Re-introduce the eggplant and allow all of the veggies to simmer.  (Here is also where you will add the raisins if you use them).

In a separate pan – add the vinegar, water and sugar and bring to a boil and allow the sugar to dissolve.  Once dissolved take it off the heat.  Add this mixture to the skillet with all the veggies.  Allow it to all blends. Remove from the heat and allow to cool.  Can be eaten warm (not hot), at room temp or even cold from the fridge.  My preference is room temp – neither hot nor cold, just right.  Serve it with the warmed sliced Italian bread.