It's all about the PPI – Algo's primed to go hyperbolic

• Stocks rally ahead of today’s PPI report

• Oil trades down to $71.30 and appears to have found stability.

• Xi Xi and Crown Prince MBS hammer out Saudi support for China’s energy needs.

• Central banks get ready to give their final 2022 comments next week.

• Try the Italian Filet of Sole – Christmas Eve fish recipe

So we tested  trendline support at 3930 on Wednesday and held it on Thursday, (something I told you would be important for investor psyche) so traders, algo’s and investors took that opportunity to go shopping for stocks that have been once again beaten up after 5 consecutive days of relentless selling triggered by concerns over what’s next? Is the FED going to stick to their narrative? 

Is the recession going to be longer and deeper than the expectation? How high will unemployment go?  What will today’s PPI (Producer Price Index) reveal? What about next week’s CPI (Consumer Price Index) reveal?  What will the FED say next Wednesday and what will the ECB (European Central Bank) and the BoE (Bank of England) say on Thursday?  So many questions – and so many answers!  Which is what causing the sometimes ‘psychotic’ reactions by the algo’s. 

In any event – it was a good day…stocks rallied ahead of today’s all important PPI report.  Remember, the PPI addresses what manufacturers are paying for the products that need to produce the products they sell to you.   It is expected to show that those costs are coming down…..PPI Final demand y/y is expected to show a decline of 0.8% that would leave it at 7.2% (down from 8%) while PPI – EX food and energy y/y is also expected to decline by 0.8% leaving it at 5.9% (down from 6.7%).  Both very dramatic declines in the cost of manufacturing.  M/M reports are expected to show slight increases…. final demand +0.2% while final demand EX food and energy is also expected to rise by 0.2%.  

At the end of the day – stocks enjoyed the company of buyers….the Dow gained 184 pts or 0.55%, the S&P added 30 pts or 0.75%, the Nasdaq rallied by 123 pts or 1.1%, the Russell added 12 pts or 0.6% while the Transports rallied by 42 pts or 0.3%.

Now recall – it was a tough five days….as investors try to reconcile comments made by Fed Chair (JJ) Powell over just how high the FED will push rates and how long the FED they will hold those rates higher – and that was what ignited the most recent declines….in the end investors have now accepted the idea that the terminal rate is headed for 5.25% and that JJ will hold them there until we see a significant decline in inflation.   The concern was (and still is) that inflation will remain stubbornly high causing the terminal rate to go even higher – something investors have not yet been keen to accept. Today’s PPI report just might put some of that concern to bed – if it is what it is expected to be.

But remember – the eco data continues to be uncertain and erratic – which is what causes the angst for investors and the markets.  For instance - The most recent NFP report was much stronger than what JJ wanted….it showed that the economy has been more resilient, it showed rising wages and it showed that unemployment remains steady at 3.7%. 

Remember – the conversation is that unemployment is going to have to go north of 5+% - some say even 6+% - before we see the complete elimination of inflation and if that happens – it is going to be painful for a lot of people.

Next week – the FED’s FOMC (Federal Open Market Committee) meeting happens on Tuesday and Wednesday…..so at 2 pm on Wednesday we will find out what the decision is….50 bps is the call….no one expects it to be any different – so there will be NO surprise there…the surprise will be what JJ says at the press conference. Will he maintain the higher and longer narrative (hawkish) or will he appear to change it IF both the PPI and CPI are better than expected (Dovish)?

Because if both of those reports are softer,  then the expectation is for JJ to ‘sound’ more dovish – something that I think would be a mistake (but is part of the reason stocks rallied yesterday).  In my opinion – no matter what the reports show – JJ needs to stop the ‘back and forth’ he needs to stop the dovish commentary – he needs to stick to the plan and stick to the current narrative, he needs to remain very clear – leaving nothing to the imagination….at least until we get to the end of the 1st quarter 2023 – where it is widely expected that the FED is going to pause  - meaning stop raising rates – just to see what the 9 rate hikes have accomplished.  In my opinion (again) there should be NO veering off course.

But again – people hear what they want to hear…..dovish investors will try to hear dovish commentary while hawks will try to convince the trading public that nothing has changed – and that folks is what makes a market…both buyers and sellers.

Now – what is the treasury market telling you?  It ain’t telling you that everything is coming up roses! The GAP between the 2 yr. and the 10 yr. has grown – and that suggests more trouble ahead….The 2 yr. is yielding 4.27% while the 10 yr. is yielding 3.47% leaving the gap between the two at 80 bps….which is up from 25 bps only weeks ago….and the growing gap suggests that not only is the recession coming, but the market expects it to be deeper than what some analysts expect it to be. 

So again – we have conflicting data…..which is why I say – the FED needs to err on the side of being more hawkish….stop giving hope to investors when it is still unclear where we are going….Because look – they went way too long even when the CPI shot up and thru their 2% target in April of 2021.  Remember the ‘don’t worry, it’s transitory’ conversation? Remember how they kept rates at zero and kept buying bonds even as inflation shot up to a high of 9% while they kept telling us ‘we got this’ even as so many analysts and strategist were screaming ‘STOP’.    Do you remember that??? 

Yeah, well, now we have the same issue – just on the other side.  Which is why they need to stay the course and raise the rates as expected until March and then pause – just like they said they would.  Remember – if they overtighten – then they can begin the famed pivot and CUT rates! And if April shows that inflation is not responding as expected then they will have another decision to make….do they wait longer to see what happens or do they start raising rates again?  Hmmm…and that IS the question.

Next up- Oil….and what a couple of weeks it has been for oil…first we had the threat that the Saudi’s were going to make additional cuts to production sending prices up and that proved to be false – they did not (after Joey gave complete immunity to the Saudi Crown Prince)  – and that helped to ignite the decline in prices…but we also had the European ban of Russian oil and the G7 price cap on Russian sea borne oil which should have helped to support the price of oil – but it did not either…….The Europeans are getting more oil from the US and Norway and the imminent disaster that everyone thought was going to happen hasn’t happened yet….but its early in the game….winter has just begun and Vlad remains the wild card here….What is up his sleeve now? 

And then we all saw those incredible demonstrations in China – the Chinese people have finally gotten tired of being locked down and welded into their own homes…and while that is sure to cause pain for some that got caught protesting – it apparently did cause Xi Xi to reconsider and relax the very strict zero covid policy…which should cause oil to rally as that ‘reduced demand’ narrative is about to be turned on its head.  This morning- oil is up 63 cts or 0.9% at $72.10/barrel.  

China telling Bloomberg that they welcomed the role that Saudi Arabia plays in ‘balancing global oil markets’ and are grateful for them being ‘a reliable major exporter of crude to China’.  This comes after Xi Xi met with the Crown Prince.

Oil dropped 22% from early November….finding a low at $71.32/barrel – breaking the September low of $74.98….something that everyone welcomed….but this morning the chatter is about how oil is overdone to the downside and is expected to find stability right here.  In the end – calls for $100 barrel are still alive and well.   

This morning – US futures are UP….ahead of the better than expected PPI report due out in 2 hrs.….Dow futures are up 50 pts, S&P’s up 12, Nasdaq ahead by 50 and the Russell is up 6 pts.  Now, if the PPI comes in as expected, then watch the algo’s go into overdrive – sending stocks higher…. the recent sell off offering lots of opportunities for investors looking beyond next week!  Or is it?  I think yes….you might think no, but again that is what makes a market – both buyers and sellers!

In addition to the PPI report – we will also get the U of Michigan surveys.  Sentiment is expected to be 57 – up from 56.8 while 1 yr. inflation expectations are expected to be 4.9% - inline with last month.

European markets are all  up by 0.25%....the China chatter helping to drive that move along with the economic outlook and expectations for the central banks next week.  Remember – we are in the final weeks of 2022…Unless we have a dramatic sell off (unlikely) - no one is making any drastic changes to portfolio’s now.  The Santa rally that usually happens is still expected to happen taking us to S&P 4000/4100 ish by year end.

The S&P closed the day at 3963 – after testing support at 3930 once again.  Futures action this morning will take us up to kiss S&P 4000 at the opening bell….and like I said – a better PPI report could see us surge up and thru 4000 to challenge trendline resistance at 4040…..And if any of the investment banks chime in (think Goldman – because they are a FED mouthpiece) and say ‘we won’ – then all bets are off as the algo’s will go hyperbolic…..Which is why – You need to stay the course, stay invested, do not make emotional decisions and continue with the plan.

 Filet of sole

This is simple to make and is a personal favorite and is one of the 7 fish dishes for Christmas Eve…. No substituting this one! 

For this you need:  Filet of Sole, Eggs, Italian Style Breadcrumbs * (recipe below), flour, Olive Oil, and tartar sauce.

Beat 6 eggs in a large bowl to make an egg wash.

Place Flour on a separate plate, place Italian breadcrumbs on a separate plate. - Now make a production line.   Flour - eggs - breadcrumbs.

Next - dredge in flour - shake off excess then introduce into the egg wash - remove from the egg wash and place on the plate with the breadcrumbs. Using a fork make sure that you cover the filet in breadcrumbs.  Place on a clean plate.  Repeat until you have breaded all of the fish.

Next turn the oven to broil and pour olive oil in a pan - maybe like 1/8 inch in pan.   Heat the oil under the broiler.... now be careful and watch - as the oil gets hot you need to make sure that you are ready to broil the filet. (Do not walk away – the oil will burst into flames if you don’t do this correctly)

Take a pinch of breadcrumbs and toss in the pan...do they sizzle right away?  If so - then you are ready.  Now place the filets in the hot oil and flip to the other side...now let them broil to a nice golden brown.... When ready – using a spatula - carefully flip the filets over to brown the other side.... Once browned - remove and place in a serving platter to join the other fish dishes on your Christmas eve buffet. Make sure to have tartar sauce on the side.

If there are any leftovers – get ready…. they make great ‘fish filet’ sandwiches the next day!” (Make sure you use toasted Italian bread, melt some provolone cheese - add a bit of tartar sauce). YUM!

Homemade Italian style breadcrumbs.

In a food processor - blend a bag of hamburger rolls (or hot dog rolls) and transfer to a bowl.  Add pepper and a little bit of salt – the cheese will add the rest -  onion powder, garlic powder and some parsley for color.  The key ingredient is 3 or 4 handfuls of grated pecorino Romano and Parmegiana cheese.  Mix well and set aside.  You can use these breadcrumbs on so may dishes, but that’s for another day.