Inflation eases, but concerns linger: Will the Fed pause or push

• CPI came in a bit hotter.

• PPI is due at 8:30 am.

• 10 yr. bond yields push higher.

• Oil UP, Gold UP, VIX confused.

• Try the Pan Roasted Chilean Sea Bass.

The WSJ plays down the latest report…

“Inflation EASED Slightly in September”

is the headline in BOLD lettering – but the sub-title not so much –

“But last major read on consumer prices before elections was hotter than expected.”

Who remembers that famous Clairol commercial from the 1960’s? 

“Does she, or doesn’t she?  Only her hairdresser knows for sure! 

Today you would ask.

“Will they, or won’t they?  Only JJ knows for sure!”

Are rate cuts off the table? – That is now the question…. Yesterday’s slightly HOTTER CPI coupled with a bigger Initial Jobless Claims number is only amplifying the issue about the state of our union leaving everyone now saying it out LOUD…. Was 50 too much?  Will the FED pause????  Leaving the others to ask – Wait, what happened to the JUMBO cut you promised?  Now, let’s be honest – the rise in jobless claims can be tied to states affected by Hurricane Helene, and the strikes that took place but are now over and next week it will be Hurricane Milton, so let’s not get our panties in a bunch just yet….

But 10 yr. bond yields are now pushing 4.07%...leaving many to wonder – What’s up with that? The FED is cutting rates, yet the bond market is telling you it’s a mistake?    

Now yesterday’s action was by no means a disaster….Stocks did decline, but they didn’t plunge….at the closing bell – the Dow was down 58 pts, the S&P’s down 12 pts, the Nasdaq lost 10 pts, the Russell down 12 pts, the Transports lost 53 pts and the Equal Weighted S&P down 28 pts.  So, again – this is no reason to light your hair on fire (yet).

Yesterday’s CPI did take the wind out of the sails a bit, and it just might act as an ‘excuse’ for markets to finally pull back from ‘all-time highs. One report doesn’t necessarily change the outlook, but we all do agree that the momentum is a bit overdone…the market is up 13% off the August meltdown, as it makes new high after new high….none of the seasonal weakness playing out the way it always does because JJ has promised lower rates. So, we will have to turn our sights onto earnings (which start today) and retail sales which we get next week.  So, now the argument for the next 3 weeks is going to be 25 bps or not? 

Now the FED Heads we heard from Johnny Williams, Tommy Barkin and Austan Goolsbee were all UNFAZED by yesterday’s CPI – as far as they are concerned we need more!  Next up was Atlanta’s Raffi Bostic – who always plays both sides of the fence – depending on the day…and yesterday he said that ‘no cut’ is very much a possibility in November…..Where is Mary Daly when you need her….Mary is also more hawkish – preferring to do nothing at the next meeting….

Now my good friend Quincy Krosby – LPL’s Chief Market Strategist says that.

“If inflation data continues to indicate that prices are generally rising amid a backdrop of a cooler labor market, the FED’s next meeting will undoubtedly involve a more heated discussion of which of the FED’s mandates takes precedence.” 

Those mandates are inflation and the labor market. So, you ask, does the FED continue to cut rates to stimulate the labor market which will stimulate inflation once again? Traders are now pricing in an 85% chance of just a 25-bps cut – but that could change after today’s PPI report (Inflation at the producer level) and the start of earnings. The latest data suggest that earnings to be up 5% y./y and 1.3% q/q.  Revenues are expected to be up 4% y/y and ½% q/q.  Those estimate down slightly from prior estimates going into the quarter.

Now over the next two weeks – it’s going to be all about the financials and the big banks…and the sector is expected to report y/y earnings decline of -12%. Now a couple of thoughts – the yield curve un-inverted over the quarter, NII (net interest income) will likely be restrained (Jamie suggested that 3 weeks ago) because of sluggish loan growth.  M&A is expected to be weak; mortgage revs are sluggish despite the decline in rates, asset management results are expected to be up (think the 5% gain during the quarter). Loan loss reserves are also expected to be UP as banks prepare for a weaker consumer (think defaults – mortgages and credit cards) but may be offset with lower rates. In the end – it will be what the CEO’s say about the future – will there be reasons to look thru these negatives?  Will they tease of more positive conditions in 2025.

Yesterday we got earnings from DPZ (beat) and DAL (missed) – so right now it’s 50/50.but in either case both stocks sold off – both painted weaker forward guidance.  

In only a few hours we will hear from JPM, BK, WFC, & BLK, next week bring us PNC, BAC, C, MS, GS, SYF, USB, & STT – now scattered in there we will also hear from JNJ (large pharma), UNH (managed healthcare), SCHW (wealth management) & PGR (P&C Insurance).  

Of the 11 S&P groups only Energy and Basic Material rose…. up 0.7% and 0.25% respectively.  The other 9 sectors ended the day lower with Communications and Real Estate out in front – down 0.75% and 0.8% respectively. Interestingly enough, Tech, which has been on fire recently – essentially ended the day flat which suggests to me that this isn’t really a big deal yet, because if investors were really worried – TECH would come under more pressure – but it ain’t over ‘til the fat lady sings.

Bonds continued to create some angst…. The 10 yr. touched 4.11% before ending the day at 4.06%....and this morning it is up by 2 bps at 4.08%.  What was trendline resistance at 4.06% is now support, leaving the long term trendline at 4.16% to be the next to fall.  If the 10 yr. pierces that – what does that do to market and investor psyche?  Is that enough to create a bit more angst? And then what will JJ do if inflation begins to rear its ugly head again? Yesterday the TLT lost 0.4% and the TLH gave up 0.25% taking both these ETF’s further into negative territory down 4.85% and 2.55% respectively ytd.

Remember what I told you yesterday…. rising bond yields could mean that investors expect the FED to RAISE rates in response to inflationary pressures or a HOT economy.  It could also mean that the gov’t is ready to spend even more money – something that both candidates have promised to do, and this increases the need for Janet to bring MORE bonds to the market to support this spending - more supply will push prices down and yields up.  And that once again begs the question – what is the tipping point for the 10 yr. yield to create a pullback in the market? 

Oil continues to push higher…yesterday it rose 3.2% or $2.35/barrel.  To end the day at $75.85. The story is the same…. the closure of oil rigs in the gulf, demand created by the recent hurricanes to hit the gulf coast, as well as the ongoing conflict in the mid-east as the news reports that an Israeli response is imminent.  The Washington Post reports that Israel’s war cabinet is meeting right now on how it will retaliate, this after JoJo begged Benny to ‘back off’.   Any attack on Iranian oil assets will widen the war in the region – which supplies the world with 30% of global production. And today is Friday – a lot can happen over the weekend when markets are closed.

Gold – which tested as low as $2620 ish earlier this week on some profit taking shot higher – rising $22 or 0.8% on the latest CPI report and the underlying concerns that maybe the 50-bps cut was a bit pre-mature. This morning gold is up another $16 at $2655 as we wait for today’s PPI report and any news out of the mid-east.  Remember – higher rates will cause the dollar to rise putting pressure on gold as investors sell it, but rising conflicts in the gulf will cause investors to buy gold as a safe haven play. And hints of rising inflation will also cause investors to buy gold as an inflation hedge… So, it is a push and a pull…. for now, leaving gold in the $2600/$2700 trading range.

US futures are all lower…  Dow futures -60 pts, the S&P’s -10, the Nasdaq -55 pts while the Russell is down 7 pts. This as the market awaits today’s economic data…. the September PPI report.  Now the question is – will it show a slight increase the way the CPI did and if so, what will be the reaction?   Remember, I did say that the CPI and PPI data is no longer the big bad boogeyman unless of course it suddenly spikes higher.

Expect the earnings parade to begin at 7 am – BLK (Investment management) just reported, and they crushed it…. Revs at $5.2 bil vs. the expectation of $5.01 bil while EPS came in at $11.16 vs. the 10.40 expectation. Now it’s funny – Larry Fink always tries to ‘one up’ Jamie Dimon on earnings day…. he’s like a 13 yr. old looking for a fight…. Now BLK is trading at its highs - $956….so what will the reaction be?  Will we see some profit taking on the back of this good news?

 We will also hear from the FED’s Lorie Logan, Austan Goolsbee (again) and Mishy Bowman.  Remember – Goolsbee wants more cuts…. Logan and Bowman are a bit more restrained….so let’s see how this goes…restraint suggests a bit of caution, just sayin. 

European markets are all trading around the flat line…. none of them are up or down by any real amount.  Investors there waiting on today’s PPI report and the tone of the start of earnings season.

The S&P closed at 5780 – down 12 pts.  You know that I have been looking for the markets to back off a bit…maybe it starts today?  The VIX (fear index) is slightly higher. up 0.6%, but let’s see what happens after the PPI report.

 In the end though, it doesn’t really make a difference to the long-term investor…. why?  Because he/she has a plan, they have a long-term outlook, they are not distressed by drawdowns, they welcome them to put more money to work.

Pan roasted chilean sea bass

You will need:  1 lb. of sea bass, olive oil, butter, onion, White Wine, Fresh wild mushrooms, Chicken stock, s&p, and chopped parsley for color.

Prepare by chopping the onion, slicing the mushrooms and chopping the parsley.  Have all other ingredients out on the counter to ease the process of creating this dish....

Preheat the oven to 450 degrees - this is important to make sure that the oven is ready to receive the fish without having to "heat up".

In a sauté pan - heat the olive oil and the chopped onion - cook until soft and translucent.  Turn the heat to high to make the pan really hot - then remove the pan from heat and deglaze with 1/4 cup or so of Wine -   When the wine has cooked off add the sliced mushrooms and about a tblsp of butter.  Reduce heat to med and cook until tender.

Now add the chicken stock - maybe 1/2 cup or so....and s&p... let it cool down.... just so it thickens a bit....

In another sauté pan heat up a bit more olive oil...season the filet with s&p and add to the pan skin side down for about 5 mins...you want the skin to be crispy......flip and cook for about 1 min - transfer to a baking dish and put in the pre-heated oven and roast for another 4 / 5 mins.

Warm the serving dishes and place a bed of the onion/mushroom mixture on the plate and then top with the pan roasted filet.  Adorn with a bit of chopped parsley.  You can serve this dish with herb/garlic wild rice and sautéed green beans.  Complement with a cold bottle of Pinot Grigio - Santa Margherita, light the candles, turn down the lights.... and you are off to the races....