The calm before October: Fed's soft landing in doubt amid market shifts

• It’s the end of the qtr.…. October 1st is tomorrow.

• Bonds are up, oil is down while Gold is kissing all-time highs.

• Earnings season to begin, Dockworkers Threaten to walk off the job.

• ‘Ja Biden’ says he will not intervene.

• Try the Risotto Pomodoro.

OK – so, on Friday some stocks clung onto the recent gains, while others just appear exhausted…..Bonds rallied, causing yields to come in a bit across the curve (2’s, 5’s, 10’s, 20’s & 30’s) , oil rallied, gold gave up $14…. The dollar index fell another 0.15%, all while the VIX may be signaling trouble ahead….on Friday it rose 10.4% to end the day at 16.96 – stuck between the short term trendline resistance at 18.25 and intermediate/long term trendline support at 15.55/14.86….all happening as the FED and ‘most’ of the FED heads try really hard to assure us that ‘nothing is wrong’ that we ‘are not going over the cliff’ and that there is nothing to see here as they get ready to cut rates by another 50 bps in early November…..Because there is absolutely nothing to see here….

Both the S&P and Nasdaq lost ground – down 7 pts and 70 pts respectively while the Dow gained 138 pts, the Russell added 15 pts, the Transports up 102 pts while the Equal Weighted S&P rose 27 pts.   

On the economic front - The FED’s preferred gauge of underlying US inflation came in as expected – no real surprise…. Personal Income and Spending came in below expectations…. while the U of Mich Sentiment survey rose from 69.4 to 70.1 – suggesting that consumers are not anxious…

Then we have Chris Larkin at E*Trade tell us that ‘growth may be slowing but we are not going off a cliff’ and Damian McIntyre of Federated Hermes – with 785 billion of AUM tell us that we should find ‘solace’ in the strength of the recent data – ‘inflation is falling, the consumer is strong and the labor market remains resilient’ – So why then the panicked cuts?

Now I say most of the FED heads,  are trying really hard to convince us that there is nothing wrong because on Friday St Louis President Alberto Musalem came out saying that he favors a ‘gradual’ cut - pushing for a 25 bps cut while Mishy Bowman reiterated her view that there was no need to cut by 50 bps and she is not supporting another cut because ‘she’ thinks the economy is still strong…….all while JJ (in a pre-recorded) speech didn’t’ offer any new details on the path of future monetary policy moves. 

Well, that’s because we know how he feels, he told us that 7 days ago… he fully expects us to land softly…….telling us that the September 50 bps cut was actually a ‘show of strength’  - but did not necessarily negate the need to make more ‘drastic cuts’ in the months ahead.

On Saturday – Nicky T (WSJ fame) published a piece that said the ‘quiet part out loud’ -

“Rate Cuts Don’t Guarantee and Economic Soft Landing”

Now remember what I always say – when the FED wants to put an idea out there and they don’t want to actually say it – they leak the idea and story to Nicky (or Goldman)  and he writes a piece (or they write a breaking report) – as if it’s his thought, as if it is him that is questioning the policy…..…. Lest you forget how Nicky published a piece suggesting that the FED might have to cut by 50 bps just 4 days ahead of the September 18th FOMC announcement…. when the FED was in blackout mode and is prohibited from talking to the media…. Capisce? Remember – the narrative going into the meeting was for 3 -25 bps cuts….and then it changed…… So, they leaked it to Nicky and boom, the next day there is a story in the journal.

Now the truth is- that all depends on exactly what we see when we pull back the sheets on the US economy.  Nicky lays out the argument like this:

“A soft landing that brings inflation down to the Fed’s goal without major deterioration in the labor market could still be tricky to achieve because it requires growth in new lending to pick up.  Bank lending has slowed to a crawl over the past year, something not usually seen outside of recessions”.

“If borrowers or businesses are reluctant to obtain new borrowing, rate cuts might do little to boost the economy.  At issue is the difference between the marginal cost of debt -which is falling, and the average rate on debt, which might still rise particularly for borrowers who locked in low rates before the FED started hiking.”

In the end – it is not clear that a 50 bps or even a 100-bps cut in rates will have that ‘soothing effect’ because the average interest rate that households and businesses face is still higher than what they have now ~3% ish. …. So, unless JJ plans to slash AND burn rates it may NOT help to prevent us from going into a recession…which btw – may not be a bad thing at all.  Only a recession will ‘fix’ the problem of higher prices….

And then we have the daily China story that seemed to be largely upbeat…. but for me it seems like the sh*t is hitting the fan….   The PBoC cut mortgage rates for 1st and 2nd homes by 50 bps. They reduced minimum down payments for purchases, they instructed all commercial banks to lower interest rates on ALL EXISTING MORTGAGES by Oct 31st to no less than 30 bps BELOW the PBoC’s prime rate.  And they are allowing state-controlled banks to lend a larger proportion of their assets.  Chinese stocks surging 26% in 5 trading days…going from -8% to +17% ytd –……. the manipulation is ridiculous… Remember – China is still an ‘emerging market’ that carries a lot of risk.  Yesterday China’s official Manufacturing PMI came in at 49.8 a bit better than August but is the 5th straight month of contraction. All this assumes you believe anything that comes out of China – something I do not.

(Overnight – stocks in China and Hong Kong surged again…+ 8% and 3% respectively as the manipulation continues).

Today is the final trading day of the 3rd qtr.….and US futures are mixed as we lock in 3rd qtr. performance.  Dow -30, S&P’s up 3, the Nasdaq +14 while the Russell is flat.  As of this morning the Dow is up 1.8% for the month, while the S&P is up 1.6% and the Nasdaq is up 2.3% - the talk of and then the ‘super-sized’ rate cut being credited for the move.

Tomorrow starts the 4th qtr. and is the 1st of October – again one of the most volatile months of the year.  The 11th officially kicks off the earnings season, while the next 5 weeks brings the Presidential election season to an end – culminating on November 5th – when we should know who will occupy the WH next.

Eco data this week includes S&P Manufacturing & ISM Manufacturing PMI’s  – expected to remain in contractionary territory, S&P Services & ISM Services PMI’s  – expected to be in expansionary territory,  Construction spending +0.2%, JOLTS Job Openings, Dallas Fed Services Activity, ADP Employment Change expected to be +125k new jobs and then on Friday the all-important NFP report – that is expected to show an increase of 146k new jobs (although the whisper numbers are betting on significantly less), Unemployment at 4.2% - unchanged, Avg Hourly Earnings m/m +0.3% and y/y +3.8%.

This morning Oil is up 0.45% or 30 cts a barrel after the targeted weekend bombings of Hezbollah by Israel.  The rising conflict now raising possible supply concerns as the conflict has the possibility of drawing Iran into the fray…And as a key member of OPEC the risk of supply disruptions rises IF Iran gets more involved than they already are….

Gold as you imagine is a beneficiary of the conflict in the middle east – as Gold remains the ultimate ‘safety’ trade. Gold is also betting on another ‘bonus sized’ rate cut at the November FED meeting.  Remember – lower rates = lower dollar = higher gold (and commodity) prices.   This morning – gold is up $10 at $2678 – trading just below the high made last week at $2708. Any pullback – could easily see it test $2600 rather quickly all while Trendline support is at $2534.

The VIX is churning…trading as high at 17.10 overnight….as it too awaits the next headline….if it breaks resistance at 18.29 – it could easily spike to the September highs of 23.30 – a 27% surge…and if it really gets anxious….then strap in….because you could see a swift surge. 

European markets are under a bit of pressure on this last trading day of the qtr.…Italy down more than 1%, France down 0.9%, while Spain and the UK are off 0.2%.  The tone this morning is a bit negative after auto maker Stellantis trimmed guidance to reflect ‘global industry dynamics’ as well as rising competition from China.

The S&P closed at 5738 down 7 pts…. with futures showing little direction…. My sense is that we will not see a lot of action other than some last-minute mark ups and mark downs in the final mins of trading today as asset managers close out their books for the qtr.

Brace yourself for October….85,000 dockworkers are on the verge of a strike affecting 36 US ports…….’Ja Biden’ (see Maya Rudolf as ‘Kammy’ on SNL) refuses to intervene even as the strike threatens to shut down ports and ‘snarl US trade.’  Railroad shippers are turning away refrigerated goods for fear of no one to unload them…. The union is calling for workers at ‘all Atlantic and Gulf Coast Ports’ to walkout on midnight Tuesday if a new contract is not agreed upon by the USMX saying that.

“The USMX refuses to address a half century of wage subjugation where Ocean Carriers profits skyrocketed from million to mega – billion dollars, while longshore wages remained flat”.  The walkout would affect 14 ports along the eastern and southern coasts…while concerns are mounting from the left over the economic impact of a strike on early voting.  

Now I expect to see a pullback, but if we see anything other than a 5%-8% pullback – they will remind us that another ‘bonus cut’ is only a couple of weeks away…and that it’s all systems go. The FED will NOT let it collapse weeks ahead of the election.

In the end – it is what it is…Don’t let your emotions get the best of you during this chaotic time…. Stay focused… Building a strong, well diversified portfolio takes time and commitment. 

Risotto pomodoro

For this your 1 1/2 cup of Arborio Rice, 1 onion - diced, 1/c of red wine, vegetable broth (maybe 64 oz), 1 can crushed kitchen ready tomatoes, fresh grated Parmegiana, olive oil, s&p, burrata cheese, fresh basil.

Heat up the vegetable broth in a pan.

While that is heating, grab a heavy bottom pan and heat up the olive oil. Now add the onions and sauté until soft.  When done, add the rice and stir until toasted.

Next add in the cup of red wine and stir until the alcohol evaporates and the wine is absorbed.

Now add – one ladle of broth and stir and let it get absorbed into the rice – Add another ladle and then add the crushed tomatoes. Season with s&p.  Stirring as the rice absorbs the broth.  Repeat until the rice is firm to the bite but not hard.

Turn off the heat – add a bit more of the broth to keep it moist. – add the basil and the fresh grated Parmegiana – mix well and serve on warmed plates.  Top with a few dollops of the burrata cheese.

Mmmmmmm! Delish.