Stocks rally – GS says don't worry about a 100 bps hike

(Kenny Polcari)

– Stocks Rally – GS says the FED is only going to hike by 75 bps.

– Lots of global central bank action this week.

– Big earnings week as well.

– Massive heat wave across the country putting pressure on the system.

Eco data on Friday suggests that the consumer is alive and well….Advance Retail sales came in at +1% a bit stronger than the 0.9% expectation….but it was the retail sales EX autos and gas that stunned the group…that came in at a strong +0.7% – when he street was expecting only +0.1%……all while the U of Mich Consumer Sentiment ticked up slightly to come in at 51.1 – slightly better than the expectation and last month’s read of 50.

Now – Industrial Production was a disappointment at -0.2% and Capacity Utilization now has an 80% handle on it…but was a bit below the expectation of 80.8% – which was seen as a positive – no matter that ANY capacity utilization with an 80% handle is considered inflationary…the thinking goes – well at least it was not 80.8%.

On top of this we have heard from some of the banks – and none of them have really surprised us with their results the negative -I would argue that they are doing the right thing…and in fact – JPM led the group – doing exactly what CEO Jamie Dimon said he was going to do – prepare for the coresounding message is that they are all preparing for – let say – a ‘more difficult’ road ahead. They are increasing reserves – in a sign that they want to be fully prepared for what is expected to be a wave credit defaults –….and while some investors initially saw this as aming ‘economic hurricane’. And when they reported on Thursday – investors were not happy – and punished him again…. (Recall they had taken another 16% out of the stock over the of June taking it down 30% ytd after he made those hurricane comments on June 2nd.).

The negative reaction – sent the whole group lower on Thursday –But the tone changed on Friday – and we can thank Citigroup for the that – they – led by Citi CEO Janey Fraser – reported sharply higher quarterly earnings per share of $2.19 vs. street estimates of $1.69, Revenues came in at $19.6 billion vs. consensus estimates of $18.12 billion – and that was a 12% increase over last year….In her commentary she said.

“In a challenging macro and geopolitical environment, out team delivered solid results and we are in a strong position to weather uncertain times, given our liquidity, credit quality and reserve levels. I am particularly pleased with our capital strength.”

And that is all the algo’s need to see….and BOOM! Citi bank soared by 13% to end the day at $49.98. It is strength – dragging the other banks with it JPM +4.5%, MS +4.5%, GS +4.3%, BAC +7% and the XLF was the best performer in the S&P – rising 3.4% on the day. The action in the banks spilling over causing investors/traders and algo’s to go bargain hunting. The rumor was that just maybe the FED will stick to the plan taking rates up by only 75 bps vs. the 100 that has been the latest chatter thereby somehow avoiding a recession (wishful thinking).

Conveniently – our friends at Goldman put out a note yesterday – saying that ‘falling inflation expectations will keep the Fed from hiking by 100 bps next week’ and then Sunday’s WSJ reiterated that idea with this headline:

“Fed Officials Preparing to Lift Interest Rates by Another 0.75% Point – Policy makers are leaning against a full point increase despite the June inflation surge”.

So, there it is…. just like last month…. deep throat (GS) leaks the decision to the WSJ just days ahead of the meeting to try and calm the markets. The idea here is that economic activity is softening – Hey! That is not what the latest Retails Sales data reflected and its not what Factory Orders, Durable Goods orders or the latest NFP report suggested. In the end – the idea of a 100-bps increase is scaring off the members from doing what they need to do…in what I think will be another policy mistake. Rates should have started to rise gradually in the summer of 2021 – if they did – we would not be here now…. But we are – so if the FED fails to do what has to happen then prepare for it to get more difficult. Just sayin’.

In any event – the Dow ended the day up 660 pts or 2.1%, the S&P up 73 pts or 1.9%, the Nasdaq up 201 pts or 1.8%, the Russell up 39 pts or 2.1% and the Transports added 246 pts or 1.9%.

Treasuries across the curve remain inverted – the 2’s are yielding 3.14%, the 5’s are yielding 3.068% and the 10’s yielding 2.94% giving the recession argument more life – especially since they have been inverted now for more than one week.

The Dollar continues to rise and that is causing economic disruption – on top of the pandemic induced supply chain issues that have caused economic disruption – expect to start hearing that the ‘US is exporting inflation’ around the world as the FED continues to raise rates. You see – in order for the FED to bring down inflation they must raise rates – to make the cost of money more expensive and it will also cause the dollar to rally – note that the dollar index is up 13% ytd and this makes US exports and commodities (that are priced in dollars) more expensive for other countries….which causes inflation around the world to get worse – Add in the rising costs of food and energy in Europe – After Putin’s invasion of Ukraine and you have a recipe for ‘economic disaster’ as inflation rates across the Eurozone and in the UK are now running at better than 9%.

Monetary policy conversations this week include:

US Treasury Secretary Yellen will be in South Korea tomorrow – and will surely be asked what the US is doing, in addition the RBA (Reserve Bank of Australia) is due to release their minutes tomorrow (rates expected to rise), the BoE (Bank of England) Governor Andy Bailey is a featured speaker at the Mansion House Financial and Professional Services Dinner tomorrow and he is expected to tell those members that ‘the goal is to curb inflation- No If’s, Ands or Buts’ – (think rising rates), all while the BoJ (Bank of Japan) and the ECB (European Central Bank) are due to announce rate decisions on Thursday…..Remember that ECB President – Chrissy Lagarde – has indicated that she will start to increase rates by 25 bps (the first hike in 11 years) bringing ECB rates to 0% (currently they are -0.25%). She is even further behind the 8 ball and will surely have to make some difficult decisions in the months ahead.

Oil – which fell to a low of $90.56 last week – caused in part by the rising dollar, part by the demand destruction narrative and partly by Joey’s trip to Saudi Arabia as so many thought he would succeed in getting the Saudi’s to pump more oil – bringing more supply to the global market – but that did not happen….he did not succeed so this morning we see oil spiking higher – up $2.36 cts (2.4%) at more than 100/barrel. Expect to find resistance at $102.50 (intermediate trendline) and then $107.65 (short term trendline). Hey Joey – here is a thought – pick up the phone and call US energy producers – we have plenty of our own oil – remember under the prior administration we were the ‘swing producer’ in the world.

On a side note – countdown til Thursday – the maintenance of the Nordstream pipeline (Russian natural gas to Europe) is set to be completed – the question now is – Will Vlad open it up and send natural gas to Europe as winter approaches or not? Expect nat gas markets to remain on the edge – nat gas was up 36% last week taking it up 80% ytd and is up again by another 3% this morning. If Vlad does not reopen that pipeline – Europeans could see nat gas prices triple…. Watch CHK +32% ytd, CRK + 55% ytd, DVN +20% ytd and EOG +12% ytd. (All nat gas stocks). All names that had surged, backed off, found support, and appear ready to surge again.

This morning US futures are up! Dow futures up 225 pts, the S&P up 32, the Nasdaq up 134 pts and the Russell up 17. Fundstrat’s Tommy Lee telling us that the retail number shows us that the economy is slowing and NOT broken and that the U of Michigan sentiment and inflation projections suggest that inflation is ‘rolling over’ causing the FED to ‘be more measured’ (note the GS note and this weekend’s WSJ article). He is also betting that the bottom is IN, and the risk is to the upside not the downside – and that is causing some investors and the algo’s to get FOMO (Fear of Missing Out) – and so you see the rally in stocks on Friday and again today.

It is also a big earnings week – today we will get SYF, BAC, SCHW and GS. Later in the week we will hear from JNJ, TFC, HAL, HAS, LMT, SBNY, ALLY, NFLX, CL, NDAQ, ABT and TSLA……to name just a few.

No eco data today – but later in the week we will get Housing Starts down big last month, Building permits down big last month, Existing Home sales, down big last month, Philly FED, down big last month, and S&P global manufacturing and services PMIs.
European stocks have begun the day higher…. Markets across the zone are all up more than 1%. Investors focused on earnings and the idea that the FED can avoid a hard landing –by raising rates ONLY by 75 bps vs. the 100 that so many have been talking about. Also – the ECB set to start the process to reign in inflation across the EZ – which is also comical – considering inflation is running at better than 9% while ECB rates are -0.25%.

The S&P closed at 3863 – up 73 pts on the day……leaving it just 70 pts away from the down trending 50 dma trendline….a line that is sure to create some resistance for investors as we manage our way thru earnings season and digest the coming macro-economic data that is sure to create angst for the FED ahead of the FOMC meeting that takes place on the 26th/27th. This morning’s action is pointing to a strong open (+40 pts right now or just over 1% – in line with what Europe is doing) and that puts us at S&P 3900 leaving us just 36 pts from that trendline.

FED fund futures continue to suggest that a 100 bps hike is possible but yesterday’s GS comments and the WSJ article has put that to bed….and the rally on Friday and what appears will be another rally today suggests that maybe, just maybe – futures traders are ‘just being a bit too hawkish’ so a 75 bps hike is now considered bullish news (fed in control) – while a 100 bps hike would be a bearish (fed out of control).

We remain in the 3600/4000 trading range.

Read Outlook: USDCAD and Oil Prices, USDCNH

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