From euphoria to reality: The Fed walks a tightrope and Lisa Cook gets a pink slip

• Investors reconsider Friday’s surge.
• JJ did not make any new/hard promises at all.
• Overnight Trump sends Lisa Cook a ‘pink slip’.
• Bonds lower, yields up.
• Oil and Gold both up – think war/risk premium.
• Try the Ricotta/Pistachio/Hot Honey Bruschetta.

Breaking news – Overnight Trump sent Fed Governor Lisa Cook a ‘pink slip’ – (via Truth Social) firing her from her job, citing mortgage fraud as the reason to let her go…. (this has been a developing story). Cook has hired famed lawyer – Abbe Lowell who said that “President Trump has taken to social media to once again fire by tweet and once again his reflex to bully is flawed and his demand lack any proper process, basis or legal authority” Oh boy – here we go again…… (FYI – Abbe is also representing NY’s AG Letticia James in her mortgage fraud case as well).

And, in more breaking news….I’ve got a surprise for you – the announcement is only days away….so sit tight…..

Stocks exploded higher on Friday – it was RISK ON! Stocks surged… and investors celebrated as JJ promised to consider a change in policy. By the end of the day on Friday, the Dow, S&P, Equal Weight S&P, and Mag 7 had all surged by about 1.75%. The SMIDS raced ahead, rising nearly 4%, while the Transports tacked on 3.3%.

And then the weekend came. Time to reconsider exactly what happened, time to digest and dissect JJ’s speech. The weekend shows were all abuzz with excitement…

That was until Monday morning. Investors, traders, and algos suddenly had a change of heart. The excitement from Friday became hesitation, hesitation gave way to doubt, and before long, the risk-on euphoria turned into a cold, hard dose of reality and stocks hit the skids….

By the end of the day – the mood from Friday was nothing but a distant memory….the Dow gave back 350 pts or 0.8%, the S&P lost 28 pts or 0.4%, the Nasdaq gave up 48 pts or 0.25%, the Russell fell 22 pts or 1%, the Transports gave back 287 pts or 1.8%, the Equal Weight S&P lost 60 pts or 0.8% while the Mag 7 rose by 112 pts or 0.4%.

So, you ask, what happened? How could we go from excitement to apathy in just 48 hours? Well, besides the fact that it’s the end of August — with so many people away from their desks, leaving exaggerated moves a very real possibility (a la Friday - something we’ve been talking about for more than a month now) — the market finally recognized a hard truth: while JJ said those things, that doesn’t guarantee he’ll be able to do those things.

Look — the Fed today is like a country divided. On one side, a vocal minority is ready to cut rates at the first sign of weakness. But on the other hand, the majority remain unconvinced, standing firm, unwilling to take that leap just yet. And in that tension lies the real story — hope colliding with hesitation.

The FOMC continues to grapple with inflation stubbornly above the 2% target even as the job market shows signs of weakening. That dynamic — pulls in opposite directions — and leaves no clear path forward, no easy answer for what it means or how it will resolve.

Friday brings us the latest PCE Index — the Fed’s favored inflation gauge — and it is likely to show (both us and the Fed) that Core PCE y/y rose by 2.9%. That would mark the fastest pace in more than five months. It only reinforces the argument that the inflation fight is far from over… just look at last week’s PPI report, which showed producer prices surging at a dramatic pace. The story here is simple: the battle is still being fought, and the Fed is walking a very thin tightrope — one misstep, and the consequences will ripple through the markets and the economy. Do I need to remind you of what happened in 1979? I didn’t think so!

In any event, the focus now isn’t if they will cut in September — they will — by 25 bps. But that’s nothing more than a token move. The real question is how aggressive they’ll be in the months that follow. Recalling that just two weeks ago, markets were pricing in 100 bps worth of cuts — 50 bps in September followed by two more rounds of 25 bps before the ball dropped in Times Square. Today? We’ll be lucky to get more than that single 25 bps trim in September — a far cry from the easing cycle investors were banking on.

And that shift only means one thing: investors will re-price stocks — lower, not higher — until we once again get clarity. And that clarity may come as early as Friday at 8:30 am, when the next PCE report hits the tape – so sit tight…..This is not the time of week to take a nap!

Yesterday we saw weakness in Building permits -2.2% while New Home Sales fell by 0.6%. Dallas Fed Manufacturing activity dropped by 1.8…. Today’s data includes the Philly Fed Non-Manufacturing (think services) activity, Durable Goods of -3.8% (which is up from last month’s -9.4%), Durable ex Transports of +0.2%. We’ll also get the Richmond Fed Manufacturing Index of -11 along with the Conf Board Consumer Confidence Index of 96.5 – down slightly from 97.2 last month.

Bonds, which had rallied on Friday, gave it back on Monday. The TLT and TLH both slipped about 0.25%, leaving the 10-year yield at 4.28%. This morning, it’s ticking higher — up another 2 bps to 4.30% — kissing trendline resistance at 4.32%. The 30-year period ended Monday at 4.88%, but this morning climbed another 4 bps to 4.93%, sitting directly on top if its short-term trendline at 4.88%.

Now, while none of this is concerning just yet, understand that when bond prices fall, yields rise — and higher yields ripple across the market. Rising yields make borrowing more expensive for businesses and consumers, they offer investors a more attractive ‘risk-free’ alternative to equities, and that can weigh on valuations for growth, tech and SMID stocks. In short: as yields push higher, stocks typically go lower.

So, you ask, why the focus on the 10-year? Because it’s the benchmark. The 10-year Treasury sits right at the crossroads — long enough to capture inflation and growth expectations, but short enough to reflect near-term monetary policy shifts. It’s the global ‘risk-free rate,’ the yardstick against which mortgages, corporate bonds, and even equity valuations are measured.

When the 10-year moves, everything else adjusts — from how much it costs you to buy a home, to how corporations borrow, to the discount rate analysts use when pricing stocks. At 4.28% it is not setting off any alarm bells, but should we push up and thru the trendlines at 4.29%, 4.32% and then 4.38% - brace yourself for downside pressure on stocks. Conversely, should yields begin to fall back towards 4.20% then you would expect stocks to push higher.

Oil pushed higher yesterday — rising $1.10 or 1.7% to end the day at $64.74. That leaves it up 4.7% since the failed attempt to bring the Russia/Ukraine war to an end. The idea of a Labor Day celebration is no longer on the table. Vlad has made it clear he will not stop the bombing in his push to steal more land — and so oil once again begins to price in a ‘risk premium’ tied to war and sanctions.

We are now rubbing up against both the long- and short-term trendlines, converging right here at $64.70 and $65.15. The next move? Secondary sanctions on countries buying Russian oil (think India and China) appear almost inevitable. Those sanctions will cause oil to rise and a break above the long-term trendline at $65.15 could open the door for a run back to $70 — reigniting inflation fears and creating one more issue for JJ to consider when deciding the next move for monetary policy.

And like oil, gold is pushing higher this morning as it too begins to once again price in a ‘war/risk premium.’ In other words, it’s the classic move back into the ‘safety trade.’ Gold is up $8 at $3,424/oz — comfortably above the trendline at $3,409.

Now, the media is crediting this move to Lisa Cook news. I disagree. While the Cook headline is certainly worthy of attention, it’s a stretch to tie gold’s move to it. Yes, the argument goes that if Cook were eliminated, Trump would have majority control of the Board of Governors, making it easier to appoint someone loyal to his cause — someone who might vote to cut rates, which in turn would benefit gold. But let’s be honest: Lisa Cook isn’t going anywhere anytime soon.

US futures are a bit lower…..(and again, that should not surprise you). Dow -80, the S&P’s -10, the Nasdaq is down 40 while the Russell is -7.

The spotlight should continue to shine directly on the ‘analysis’ of what JJ said on Friday and how different market participants will respond. The Lisa Cook thing will conveniently be just more noise in the background. We are in the final week of summer – volumes will remain low which means moves will be exaggerated (kind of like what we saw happen on Friday).

The S&P closed at 6,439 — down 28 pts. The recent action shows that having a plan is important.

Ricotta, pistachio and hot honey bruschetta

This is a simple yet delicious appetizer that you can serve at your Labor Day party.

It is quick and simple to make – and will be a hit.

For this you need – a baguette sliced into rounds. Fresh whipped Ricotta, Crushed pistachios and some hot honey.

Begin by toasting the ‘rounds’ in the oven – no butter, no oil, just toast the bread on both sides.

Now – when serving – place the whipped ricotta on the toasted baguette round, top with the pistachios and drizzle with the hot honey.

Doesn’t get any more complicated than that.