Markets Stuck in a Loop: Geopolitics, Oil and the Fed Keep Stocks Churning Ahead of CPI
Things You Need to Know
- The churn continues for stocks, bonds, oil and gold.
- CPI today, PPI tomorrow – I think it’s a non event.
- Deal or No Deal? What’s next for the Middle-East.
Ok. so we are stuck in a loop – stuck between the geopolitical headlines, and the economic headlines and what that means for the FED.
Stocks came under pressure again on Tuesday as traders and the algo’s decided that it was another day to NOT get too aggressive.
At the end of the day – the Dow lost 184 pts, the S7P gave up 25 pts, the Nasdaq lost 160 pts, the Russell added 10 pts, the Transports lost 69 pts, the Equal Weight S&P gained 18 pts while the Mag 7 lost 320 pts.
4 Sectors gained ground – Industrials +0.6%, Utilities +1.2%, Energy +1.25% and Basic Materials +0.1%. Of the sectors that lost ground – Real Estate was the winner – down 0.7%. The other 6 sectors while down, were not down significantly…. which suggests – nothing other than more rotation and some risk management – low volumes confirm that lack of conviction.
Eco data – Small-business optimism climbed to its highest level in nearly a year as businesses increased hiring plans while inflation pressures showed signs of easing. And that matters. Because it tells you this economy is NOT falling apart. Yes, housing is soft and the NFP report was weak, but small businesses are not acting like the world is ending. Small business owners are more optimistic about the economy.
Housing Needs Price Discovery – where are they getting their data?
Existing-home sales fell to a three-month low in July as elevated mortgage rates continued to squeeze buyers – but here’s the thing. Housing is local. In my Florida neighborhood homes that are priced correctly are selling within weeks. In NYC demand remains strong. On Cape Cod – there is plenty of action. Why? Because demand is there and sellers are realistic. It’s just like stocks; there are always buyers at the right price.
And that suggests the national housing market has a price-discovery problem. Buyers are being asked to absorb yesterday’s home prices with today’s mortgage rates, while many sellers remain anchored to prices created during an era of extraordinarily cheap money. Something has to give — either incomes rise or prices adjust.
And I’m not convinced cutting rates is the answer because cheaper money simply stimulates demand again. (think about what happens to stocks). Holding rates here – or raising them if inflation demands it may ultimately help force the reset housing needs. Remember, extraordinarily easy monetary policy helped inflate asset prices for years — stocks, bonds and real estate. In the end – Price it right and it will sell.
Treasuries caught a modest bid – and I mean modest – the TLT and TLH both up 0.2%. The 2 yr down 4 bps at 4.20%, the 10 yr down 2 bps at 4.68% while the 30 yr lost 3 bps to end the day at 5.23%.
And oil continued to thrash around. Mid-day, Pakistan suggested that the U.S. and Iran were “close to some sort of arrangement,” but then, soon after that, the Iranians came out and essentially said — NO DEAL.
Oil went down…and then it went right back up.
So, while oil remains the focus, the market is getting tired of reacting to every headline, every rumor and every whim. From here on out, the market wants to see the money. Not an understanding. Not a maybe. Not “we’re close.” Show me a signed deal AND show me the Strait reopening. Until that happens, oil is going to continue carrying a geopolitical risk premium — and traders should expect crude to keep thrashing around with every new headline. This morning oil is trading at $82.30 – down 50 cts.
Gold is trading at $4411 up $40. 4,500 is the next level to watch – it is long term resistance – if we test it and pierce it then a move towards $4,750-ish is next.. A failure could see us test support back down at $4,160.
Which brings us to today’s CPI report and tomorrow’s PPI report. The expectation is that consumer prices and producer prices will show a decline in the monthly inflation report. But as we discussed, the market may look right through it because those reports are backward-looking and don’t yet capture the full impact of oil’s latest move.
In fact, I think that most investors are now assuming that until we have a real deal, with real terms – then this oil story will continue, and inflationary pressure will continue as well.
So now the market has to reconcile two very different messages. The economy is slowing around the edges — which gives the Fed a reason to remain patient. But oil continues to threaten higher prices leaving us to ask – What happens to August inflation if oil stays above $80? What happens if WTI pushes toward $85? Or $90? Exactly!
Oil is a geopolitical story that turns into an inflation story that turns into a bond story that turns into a Fed story. And then it becomes a stock valuation story. See how we connect the dots?
European markets are a bit higher…..
US futures are higher…. Dow futures up 46 pts, S&P’s up 17, Nasdaq up 185 pts while the Russell is up 4 pts.
The headline this morning is that the US has taken total control over the strait – Trump saying that ‘we own it’. Iran, clearly not in that camp – I’ m not sure if that’s good or bad anymore – sounds like more noise to me. And that is exactly why you stick to your plan…. None of this – CPI, PPI, Iran, or the FED should cause you to change course – yet. Remember – it is late august…. trading volumes are in decline and that can exaggerate moves in both directions – which further supports the argument of staying the course.
The S&P 500 closed at 7,728 – down 24 pts. Technically – trendline support is at 7500 with resistance somewhere between 7,900/ 8,000. I’m still in the camp that we could see another draw down as we move into September – ahead of the mid-terms. The extent of that depends on many factors – the conflict in the middle east is in my opinion – at the top of that agenda.
Take good care,
Kp
Kenny Polcari is a partner and Chief Market Strategist at Slatestone Wealth – A boutique wealth advisory firm with $2 billion dollars of investor assets under management. In this role, his responsibilities range from market and economic analysis to investor education interpreting the ever changing economic and market landscape on behalf of Slatestone and how those impacts may affect future investment and planning strategies on behalf of their clients. With more than 40 years of industry experience as a member of the NYSE serving institutional investors both at home and abroad – he is a seasoned and well-known voice on the markets. You may recognize him from his many years serving as a market analyst on Fox Business and CNBC or his ‘Trader Talk’ Podcast on the Yahoo Finance Channel. For more, please visit his Substack HERE.
Disclaimer. Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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