Markets surge as cooler PPI sparks rate cut speculation

• PPI causes the algo’s to go into overdrive.

• Stocks and Bonds Rally.

• We await this morning’s CPI report.

• Oil churns - China demand slows while US demand is strong.

• Gold remains north of $2500.

• Try the Risotto  All’ Amarone.

And BAM!  Stocks rallied; bonds rallied causing yields to fall after the gov’t reported a ‘cooler’ than expected PPI report – giving strength to the idea that there is now NO reason for the FED not to cut rates in September. Swaps traders are now – get this – pricing in a 40 bps cut in September with another 65 bps worth of cuts split between November and December -  for a total of 105 bps by the time the ball drops in Times Square – taking rates to 3.95%-4.2% - (they are currently 5%-5.25%). 

You see – the sense is that the FED has succeeded in bringing down inflation but now in order to ‘guarantee’ that we don’t go off the rails – they need to cut aggressively….(an idea I do not agree with)….In my mind, an aggressive rate cut says something is wrong…and sends a different message, and by the way,  this week alone, we’ve heard from 3 FED heads that say they ‘remain cautious’ about cutting rates…which does not suggest to me that the ‘team’ is ready to make a ‘jumbo rate cut’.  And again – whether it’s 25 or 50 bps – is it really going to change the fact that prices are still going up for the things we need every day? Let me answer that question- NO.

And investors/traders and algo’s loved it…. which is a big change from how they felt last week – when they claimed the world was falling apart!  As Bloomberg tells us – “The S&P 500 Notches it Biggest 4-Day Rally This Year!”

The Dow gained 410 pts or 1%, the S&P surged by 90 pts or 1.7%, Nasdaq exploded higher rising 407 pts or 2.4% (again thank the Mag 7),  the Russell rose by 34 pts, or 1.6%, the Trans up 152 pts or 1%, while the Equal Weight S&P added 78 pts or 1.2%.  

The TLT ETF (20 yr. bond proxy) rose by 0.8% while the TLH ETF (10 – 20 yr. bond proxy) rose by 0.7% - leaving the 2 yr. yielding 3.93% down 7 bps, and the 10 yr. at 3.84% down 6 bps.  The AGG (aggregate bond index – which includes total US investment grade bonds – think Treasuries, Corporates, MBS, ABS and CMBS) rose by 0.4%.

This was all just 24 hrs. before we get another key piece of inflation data, now due out in 3 hrs.….the July CPI report – which details inflation at the consumer level….remember the PPI details the cost of goods at the producer level…and since that is cooling – then you would expect the CPI to be cooling as well – since prices FLOW down from the PPI to the CPI…Capisce?

Now while the PPI showed cooling, the estimates for today’s CPI are in fact just a tad higher…. CPI m/m is expected to be +0.2% (up from -0.1%), Ex food and energy of +0.2% (up from +0.1%).  CPI y/y is expected to be 3% (flat with last month) and Ex Food and Energy of 3.2% down from last month’s 3.3%....So on the face of it, it looks like a mixed report that actually shows pricing rising a bit m/m – but cooling y/y….….but my sense is that after yesterday’s reaction – even if it comes in as expected – they will ignore any negative implication – because they have already made up their minds….JJ has to cut rates!

But remember – the FED has two mandates – price stability and full employment and the sense is that now that inflation appears to be cooling – although I have not seen any relief in prices of the things you and I need every day – they can refocus their efforts on the labor market – which is also showing signs of slowing – not what the FED really wants to happen at this point… – So, the expectation is that a slowing labor market demands lower rates to help the labor market recover…. But you see here is the rub…. lower rates could stimulate demand that will cause inflation to reignite……so it is a very fine line he has to walk…. Stay tuned….

Yesterday we heard from another FED head that added more confusion…. – Atlanta’s Raffi Bostic – and he said that he continues to look for ‘a little more data before supporting a reduction in rates’ although he is confident that they will cut by the end of the year. He takes after Kammy – sounds like word salad to me…. Listen, stop with the nuances – either cut or not, but stop with the word salad.  We will hear from the FED’s Alberto Musalem and Patty Harker on Thursday and Chicago’s Austan Goolsbee on Friday.

Just have to say one thing….when I came into this business in 1980 – the FED never did what they do today….they never spoke to the press, they never asked you to come lie down on the couch and take a Xanax and ask you if you were OK – they came out from behind the curtain and told us what they decided and boom, the market had to figure it out…They didn’t’ send each member out to discuss what they thought or what might happen – they said NOTHING…and in a certain way – it was better – it separated the ‘men from the boys’ and the ‘women from the girls’ (politically correct) …just ask anyone who was around then. 

Oil  which had surged up and thru $80 on Monday – retreated a bit yesterday ending the day at $78.35 on the same old China weakened demand story and their embrace of ‘clean energy’  as a reason for oil to fall….Ok – you run with that…this morning the API reported that US crude inventories fell by 5.2 million barrels – and gasoline inventories fell by 3.7 million barrels - suggesting that demand in this country remains strong…and as a result – oil is up 20 cts at $78.55. The EIA is expected to report their findings later this morning. 

Oil markets are also awaiting the next move by Iran against Israel after they ‘vowed a severe response to the killing of a Hamas leader last month’. All while Iran is holding military drills in the Caspian Sea and the US is sending warships and a submarine to the Mid-East.

Gold is now in a new century…. $2500.  Part of the move up due to a falling dollar, think lower rates and part is due to investors seeking a ‘safety’ trade during times of stress…and there is a bit of stress. This morning – gold is trading up $3 at $2510.     

US futures are churning…. Dow -12, S&P’s up 1, Nasdaq flat and the Russell is up 5 pts.  All this as we await today’s 8:30 am report on the state of the latest CPI report. GOOG is making headlines and is down 1% after the Justice Dept. says they are considering breaking it up!    

European markets are all higher…. up by about 0.3% across the board. UK inflation rose by 2.2% below the estimate of 2.3%.  Services inflation rose by 5.2% down from 5.7%.

The S&P closed at 5434 up 90 pts…. taking us right up the short term trendline resistance at 5451.  Yesterday, I said that I thought this would provide some resistance, but after yesterday’s surge, we could push right up and thru it if todays’ CPI is better than expected. Watch what futures do at 8:30:30 seconds…If they like what they hear, we will pierce that and more on the opening…leaving the early August high of 5566 in the bull’s eye. Remember what I have been saying…. many market participants are away from their desks – enjoying the waning days of summer….so moves can and will be exaggerated (in either direction)

In the end – be confident in your portfolio - take advantage where it makes sense while building in some defensive positions.…. make sure you know what you own and in times like this talk to your advisor if you are concerned.

Risotto all'amarone

This is one of my favorites and comes to me from the Puglia region of Italy.  This is the region that represents the heel of the boot – halfway up the calf.  It is on the Eastern coast of Italy on the Adriatic Sea. 

For this you will need:  Vialone Nano Rice – similar to Carnaroli but produces a creamier delicious risotto, Fresh Monte Veronese cheese – this cheese is made from cow’s milk and is produced in Northern part of Verona.  It is thought to be one of the great cheeses of the Lessini mountains.

You also need: Finely chopped onion, butter, beef bone marrow, extra virgin olive oil, beef stock and a 1/2 bottle of Amarone della Valpolicella.

Begin by heating up the Amarone. - do not boil - just slowly heat it.

Bring the beef stock to a boil and then turn to simmer.

In a separate saucepan, heat the butter, bone marrow and a bit of olive oil, sauté the onion. When the onion gets golden brown, add rice, stir and toast over the heat for several minutes.  Season with s&p.  Slowly add the Amarone – stirring all the time as you add allowing it to absorb in the rice.

To complete - add the hot beef stock one ladle at a time.  As it is absorbed add another ladle always stirring with a wooden spoon. Taste and adjust seasoning.  Cook until the rice has absorbed all of the broth, and the grain retains it texture – do not cook so much that you make it mushy.  Turn off the heat; add a dollop of butter and the grated Monte Veronese cheese.

Serve immediately in warmed bowls.  It doesn’t get any better than this!