It's the end of the month and the Fed continues to confuse

• It is the final day of January – Expect Window Dressing.

• The FED continues to confuse…. Khashkari suggests a pause, while Bostic suggests a 50-bps increase.

• Oil – pushing higher over Russia/Ukraine drama.

• Treasuries yielding 1.78% on their way to 2%.

• And what is next for cryptos? $30k is KEY for.

• Bitcoin Try the Linguine with Prosciutto and Peas.

Stocks closed in the plus column on Friday – January 28th…. Eco data suggests that inflation remains an issue – the PCE (Personal Consumption Expenditures index) rose by 4.9% y/y while another report revealed that employers spent 4% more on wages and benefits as those costs rose to a 20 yr. high – only helping to fuel the inflation story. Rising employment costs due to a tight labor market and the rebounding economy continue to tell the story and while wages were up, prices were up even more leaving the average worker still behind the eight ball. And this is what it means when we speak about wage/price spiral inflation. Wages go up, but prices go up, even more, putting more pressure on wages, which puts more pressure on prices….do you see the cycle? Meanwhile, Personal Income rose by 0.3% and Real Personal Spending fell by 1% - which does make sense after the rapid pace of spending in the 4th qtr. when the media created a buying frenzy as they warned us all that if you didn’t go out and buy stuff in September/October and November – then you wouldn’t have anything to put under the tree…..a narrative which I abhor.

In any event – all the indexes ended up in the green – rising significantly after 3 lousy weeks of stock performance. The Nasdaq rising 420 pts or 3.2%, the S&P up 105 pts or 2.4%, the Russell up 38 pts or 1.9% leaving both the Dow Industrials and Dow Transports up 564 pts or 1.6% and 240 pts or 1.6% respectively. Much of the move being credited to an oversold condition in the markets which had the Dow off 8% from its November high. All while the S&P is off 10%, the Nasdaq off 18%, the Transports down 14% from their November highs - leaving those three indexes in correction territory, while the Russell is off 22% from it is high, leaving it in bear market territory. It has been for all intents and purposes – a tough month, but not one that should be such a surprise to anyone.

As we maneuver our way through the FED tightening - Navigating the transition from a high-growth, high-inflation environment to one of more moderate growth and hopefully more moderate inflation is going to be the key challenge in 2022 for the Federal Reserve and global central banks.

Expect volatility to remain elevated as we digest the many market forces that remain in flux. Below I outline how my thoughts on the turbulence.

2022 promises to be a year full of angst yet opportunity… There are three paths that we could follow. The first – (most favorable but the most unlikely) - will see inflation fall while growth remains strong – especially if we are going to see 4 – 6 hikes – which would make it reasonable to expect that the economy would slow.

The second and more challenging path would be to see rates rise, inflation continues to rise or stay stubbornly elevated as growth stalls – very much a possibility as the momentum appears to be building and the path for inflation is up rather than down (now.). A third scenario presented on Friday suggests that we will see an initial rate rise in March and then a pause in May/June - in complete contradiction to the narrative that has been shoved down our throats. Over the weekend – Minneapolis FED President Neely Khashkari did suggest that ‘a rate pause is conceivable in the spring.’ To which I would ask – the spring? That is when we are set to launch, now we are pausing?

And here is why this makes zero sense to me. The FED has now enlisted the help of most FED members to join in the conversation begun in late December when St Louis Fed President Jimmy Bullard (then a non-voting member) first suggested that the FED needs to be more aggressive, they need to halt the stimulus and they need to consider reducing the balance sheet all in tandem. Recall, he said that late in the month and many tried to push those comments to the back burner ahead of the new year. Then in early January Goldman Sachs, followed by JPM, BAC and a range of others joined into that narrative suggesting very much the same thing- but it was now the new year, the slate was wiped clean, and we have 12 months to figure it out. Soon calls for 6 – 8 hikes were appropriate – which really makes Khashkari’s comments at the very least tone deaf. In my view – we cannot go from saying that the time is NOW, and then suddenly say – well maybe not…. It wreaks of mismanagement and challenges all levels of credibility. The transitory argument failed miserably, so any suggestion that we could ‘pause’ after the first 25 bps hike seems foolish. Or does it? Enter state left - Atlanta Fed President Raffi Bostic told the Financial Times that

“Every option is on the table for every meeting.”

And a March rate increase could be 50 bps and not the expected 25 bps…. a narrative that I also believe is appropriate….and that my friends just might be the reason for the Khashkari comments – because a 50-bps rise would double the expectation so maybe that May/June increase could be put on ice. Do you see how they weave the narrative? We have gone from ‘no problem, we got this’ to ‘hmmm, maybe its not so transitory’ to ‘we need to aggressively combat rising prices and we can expect 4 – 6 rate hikes in 2022 and the start of balance sheet reduction’ to ‘well, maybe we can raise rates in March and then take a break.’ They float every possible option this way they can say to the investment community – Why are you surprised? It was out in the public square.

In the end – My guess is that the FED will need to force a recession to halt rising inflation – because I just do not see how he can maneuver a soft landing…. My comments last week suggested that Jay missed the opportunity to take back the conversation in Wednesday’s press conference. What we are seeing is that all these cross conversations continue to cause angst and volatility in the markets and until there is more clarity on the future FED path, then we can expect this to continue.

This morning US futures are mixed on the final trading day of the month. Dow futures are down 100 pts, the S&P’s down four, the Nasdaq up sixty-two, the Russell down 12 pts. 10 yr. treasuries are yielding 1.78%, oil is trading at $87.39 (now up 35% from December) and going higher as the Russia/Ukraine story continues to steal the headlines. The VIX remains elevated and is now up 70% from the early January lows.

While there isn’t any real economic news today – it is a full week of data points….Markit US Manufacturing PMI, Markit US Services PMI, Construction spending of +0.6%, ISM Manufacturing PMI, JOLTS Job Openings of 10.3 million, Factory Orders, and Durable Goods, and the biggie – Friday’s Non-Farm Payroll Report – exp of +150k new jobs created, (although estimates range from a loss of 150k jobs to gains of 200k jobs) while unemployment is expected to remain at 3.9%. Avg Hourly Earnings up 5.2% y/y (up from 4.7% last month), once again suggesting upward pressure on wages which will see prices rise in the coming months. (wage/price spiral). Brian Deese – Sr. Advisor to Joey, is already out there trying to explain away why Friday’s NFP report might look a bit ‘wonky’ – as the administration attempts to explain away what a loss of jobs might be.

Earnings this week, include SWK, PHM, XOM, PYPL, GOOG, AMD, SBUX, and ABBV.

European markets are mixed on this final day of trading in January. Monetary policy decisions are due out from the BoE and the ECB and that will help shape investor reactions this week. Earnings will continue to drive the individual action while the Russia/Ukraine situation will continue to drive the geopolitical conversation. As of 6 am – the FTSE is -0.03%, CAC 40 + 0.25%, DAX +0.7%, EURO STOXX +0.6%, SPAIN -0.13% and ITALY +0.9%.

Crypto’s continue to churn in place…. Bitcoin is trading at $37,200 and Ethereum at $2,550 – as the coming crypto winter continues to snag the headlines. A crypto winter refers to the prolonged bearish period when prices continue to fall over many months…. Bitcoin is down 50% since November and would need to find support at $30k to calm the markets. A failure at $30k could easily see $20k in a heartbeat and if $20k does not hold then all bets are off….

The S&P closed at 4431- rising 105 pts or 2.4% on Friday. It is the final day of the month, so expect lots of window dressing as portfolio managers work to ‘dress up’ their portfolio’s going into February. The S&P remains below all three trendlines – and depending on how today ends, we might get a better sense of the next move. I am still in the camp that we must test the lows put in on January 24th….4,222 before this is over…. Just to be clear – there has been a lot of technical internal damage done to the markets, so it will thrash around until it gets clarity. The FED holds the key right now, what they say does matter, but it will be what investors HEAR that will drive the action.

Linguine w/prosciutto and peas

For this you need: Linguine, thinly sliced Prosciutto - chopped, Olive Oil, Fresh garlic – thinly sliced, Fresh grated Parmigiana cheese, Chopped Fresh Parsley, s&p and Fresh frozen peas – That you defrosted and blanched then set aside.

Bring a large pot of salted water to a rolling boil – Add the linguine and cook for about 7 mins – leaving it aldente.

In an lg sauté pan – add some olive oil and place over med heat. Add the chopped prosciutto and sauté for 2 – 3 mins. Remove and set aside.

Next – add more olive oil to the sauté pan and heat, Add the garlic and cook until fragrant – 1 – 2 mins…. Now turn the heat off and add back the prosciutto and peas, season and toss.

Strain the pasta – reserving mugful of the pasta water – add the linguine to the sauté pan and mix well. If the pasta sucks up the oil – add back some of the pasta water to re-moisten. Toss in a handful or two of the parmigiana cheese and mix well. Serve immediately into warmed bowls.