The Fed message appears to be pause, stocks continue to rally

• Bonds continue to advance, sending yields down.

• Lots of FED commentary – the message?  We remain in pause mode.

• PPI due out today…what will it show?

• FOMC mins due out at 2pm…what will they show?

• Middle East conflict enters 5th day…. Jo Jo offers support for Israel but says nothing about Iran.

• Try the Chicken Scampi.

Stocks surged again…. The Dow ended the day up 135 pts, the S&P up 23, the Nasdaq gained 79, the Russell moved up 20 and the Transports gained 135 pts.

The FED heads are tripping over each other to convince us and the markets that maybe they have done enough (for now) that maybe we are now in official pause mode… Bostic says – policy is ‘restrictive enough’, Vice Chair Philly Jefferson said that we are in a ‘position to proceed carefully’.  Lorie Logan adds that higher yields may mean less need for the FED to raise rates again and Minneapolis Fed Pres – Kashkari is perplexed on why treasury rates were rising now…. Saying “it’s hard to know…. but it’s possible that the gov’t is issuing a lot of debt (do you think?).  Think the classic supply/demand lesson….More supply puts downward pressure on prices and in the bond market that means yields must go up….He offered another lesson – maybe it’s just that the US economy is strong and we can expect higher growth for the next 10 yrs. so higher rates reflects that analysis….…..  But then he went onto say that the FED is getting mixed data and “they are trying to make sense of it”.  He also went onto say we are on our way to a soft landing…but remained coy on what the FED should do in 2 weeks.  Recall, yesterday I told you that Neely has been calling for a 6% terminal rate – along with Loretta Mester – if he changes his tune then that would be a notable change…and it kind of sounds like he is changing his tune…. Fed Governor Chris Waller – said that they will stay on the job to get inflation to 2%.... but also, did not commit to a move on November 1st. 

This morning Fed Governor Mishy Bowman was a bit clearer – she thinks that the FED needs to hike rates further…. telling Bloomberg.com that “despite recent improvements, inflation remains well above the FOMC’s 2% target.  Domestic spending remains strong, and the labor market remains tight.”  So, in the end, it sounds like 3 of them are committing to no hike and the other 2 are playing on both sides of the fence – this way they can point to their comments and say – ‘see, I told you….’  And 1 of them is firmly calling for higher rates.

And not to be outdone – guess who chimes in, in today’s WSJ???  Nicky!!!  You know the Fed’s ‘deep throat’! When they want to send a message as to the direction of the FED or what the FED is thinking they ‘leak’ a story to Nicky, he publishes it in the journal and then it’s all good…Page A2 –

‘Higher Bond Yields Likely to Extend Fed’s Pause” and you know what the clue is…the word ‘likely’…..and so, let’s move on….Surely Goldman Sachs is due to put out a follow up piece any day now….that’s the one/two shot…first Nicky and then Goldman….so keep your eyes open….Because – it is coming.

Fed Fund futures are now showing a 60% chance of NO hikes in November and a 70% chance of NO hike in December…..….Essentially – what the markets are suggesting is the need for ‘lesser’ is better…and by lesser – we are talking about lesser rate hikes, but not ‘lesser’ for longer…I still think that they need to hold rates higher for longer….and I think they have made that clear…but I guess that narrative could change too if the plot thickens…..and the plot appears to be thickening ….but not with economic issues as much as geo-political issues….and while those issues don’t usually price stocks in the long run, they do provide chaos in the short run…..and while this will too, I am not sure just yet that it will be a reason for the FED to change the narrative. So, while I now think that the FED will pause (not that that means I agree with that decision), I remain in the higher for longer camp.

Now in addition to the PPI report due out today at 8:30, we will also get the latest FOMC mins – what will they reveal? Will they reveal what they all seem to be saying?  And then tomorrow will be the latest CPI report and the risk there (and by the way to the PPI as well) is to the UPSIDE….mostly driven by energy prices and what that does to nearly everything we buy and do….An upside surprise could disrupt this new (pause) narrative and then the risk for stocks and bonds will be to the downside…..(again).  Now while they appear to be saying pause – an additional hike ‘could be’ in the cards – if it appears that the FED was premature in their decision to pause…. something reminiscent of what happened during the Volker FED in the late 70’s.  Do I need to remind everyone what happened then?  Do I need to remind you that they ‘prematurely paused’…. I didn’t think so.

In addition – yesterday brought us the NY FED 1 yr. inflation expectation and it was just a little ‘hotter’ than the expectation. Coming in at 3.67% vs. 3.63% and while it appears to be insignificant – the fact is – it is up and not down…. but apparently, that was not important yesterday.

Additional eco data due out today is Mortgage Apps – which were down 6% last week (not a surprise) - what will that data point show today?  More weakness? Or not?  Remember – 30 yr. rates are now better than 7.5%....and we are in the usually slow fall season…. Sellers now have a decision to make – do they want to risk rates going higher, putting more pressure on prices or not?  Another tick higher in rates will surely begin to cause sellers to get more anxious and aggressive when pricing their property…and that is what the FED wants to see – housing prices need to move down…. But here is the other issue.

US futures this morning is up again…. Dow futures + 80, S&P’s up 10, the Nasdaq ahead by 45 and the Russell is up 3. Treasury prices continue to push higher and that is sending yields lower again…the 2 yr. is now yielding 4.96%, the 10 yr. is now yielding 4.55% - a dramatic move off of last week’s push towards 5%.... the shorter duration 3- & 6-month bills continue to yield 5.5% ish. 

Oil continues to hover around the $85.50 level…. after testing $81.30 earlier this week…it is not back on the north side of the trendline…. leaving it in the $85/$85 trading range.

Gold – continues to push higher (think a safe haven asset) …. this morning up $11 at $1886/oz – this all as the geo-political tensions rise…. As well as the dollar softens…. on the back of some FED commentary suggesting another pause.  The dollar index is now trading at 105.82……and likely going a bit lower – IF the FED in fact remains in pause mode.  IF it does – look for gold to test $1927/oz.

European markets are mixed to lower…..after that strong rally they saw yesterday…..Bank of Portugal Governor – Mario Centano telling us that the ECB – while willing to raise rates is likely also finished hiking…which then puts them in pause mode and that is what has caused the advances across the region over the past week. And like the US – the ECB is expected to hold those higher rates for longer.  Yesterday, we learned that EZ inflation came in at 4.3% - a level not seen since October 2021.   

On the geo-political front - the unfolding conflict across Israel and Gaza are scenes out of a nightmare and is only getting worse – Hezbollah launching rockets form the north (Lebanon) while Syria is now joining in launching rockets from the east….….….Videos of not only the rockets, but raw videos of the barbaric nature of Hamas is mind numbing….and difficult to process….and this is causing outrage around the world…..except in Iran, Lebanon and Syria – which says it all.  Jo Jo interestingly remained hush during his press conference on Iran’s role in all of this.

The S&P closed at 4358 – up 22 pts and there is a real possibility that we kiss and test trendline resistance at 4385….Now a quick look at the chart reveals that the intermediate resistance and short term resistance are about to cross….with the short term resistance slicing down thru (not up thru) and that will cause some consternation for the markets….as it struggles with what to do next.  If we push thru – then we could see the S&P advance, testing levels seen in late August…. think 4500 ish. 

Which again – only supports my point as a long-term investor…. stick to your plan…don’t try to pick tops and bottoms, build a strong, diversified portfolio.

Chicken scampi

This is an easy dish to make, and you can serve it over linguine or even white rice.  It is the perfect alternative to the more traditional shrimp scampi for anyone that does not like shrimp.

For this you need:  1 1/2 lb. skinless, boneless chicken cutlets cut into bite size pieces, s&p, butter, Olive oil, thinly sliced garlic, 1/4 cup dry white vermouth, 1 tblspn freshly squeezed lemon juice, finely chopped parsley leaves,  1/4 tspn grated lemon zest and 1 lb of linguine (if you choose to serve it over pasta).

Rinse and pat the chicken dry – season with s&p and set aside.

In a lg nonstick skillet – add butter, splash of olive oil and the garlic – sauté around for a couple of mins.  Now raise the heat to high and add in the chicken pieces.  Cook the chicken for about 8 – 10 mins.   When cooked – remove from pan and set aside.

Next – add in the vermouth and lemon juice – bring to a boil – it should begin to thicken a bit – no more than 40 secs or so.  Add the lemon zest and parsley…scrape the bottom of the pan to get any bits.  Turn off the heat and add back the chicken. Stir well to coat.

At this point you can serve it over the linguine.  You should also make a large mixed salad, tomatoes, cucumbers, scallions and dress with oil and a squirt of lemon juice and a shake of dried oregano and s&p finishes this off nicely.  Don’t forget the garlic bread.