Wall Street Unplugged
Episode: 926July 28, 2022

What Powell’s latest remarks mean for the markets

Federal Reserve

Frank’s on vacation with his family, so I (Daniel) am behind the mic this week.

The market surged after Fed Chair Jerome Powell’s press conference yesterday, which followed another 75-basis-point interest rate hike. I break down what he said that sent markets soaring… and what it means for “risk-on” assets going forward.

The next Fed meeting isn’t until September, which means investors can shift their attention back to inflation and the economy. I share what to expect from inflation over the next couple of months… and how the recent pullback in commodities will affect the data.

Despite the pullback, I’m still bullish on commodities… and explain why you should have exposure to this sector—particularly oil and gas.

Inside this episode:
  • Why the markets surged after Powell’s press conference [1:30]
  • Powell’s thoughts on jobs, spending, and whether we’re in a recession [9:20]
  • The role of commodities in future inflation data [13:15]
  • Why you should be long energy stocks [18:52]

Wall Street Unplugged | 925

Why the Coinbase vs. SEC saga is a huge deal for crypto

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on main street.

Daniel Creech: It’s Thursday, July 28th, and you’re listening to the Wall Street Unplugged Podcast. Hello and welcome. We have a fun show for you today because Jerome “Stock Market Bull” Powell is wrapping up, or just recently wrapped up, a Q&A after the Fed meeting. We’ll get to that in just a minute. Hello, this is Daniel Creech, Senior Analyst here at Curzio Research, filling in transitory guest host behind the mic for the one and only Frank Curzio, who, as I mentioned yesterday, continues to be on vacation with his family further yonder down south.

Daniel Creech: Let’s get right into it. I’m going to go over the Fed, my opinion on the action that happened. And then if I have some time, because I want to keep your attention, keep this limited… And we have some programming scheduling conflicts. We have to do some things earlier. When Frank’s out of town, everything just goes haywire. Just kidding. Send your feedback, good or bad questions and comments to me, daniel@curzioresearch.com. That’s daniel@curzioresearch.com.

Daniel Creech: Earlier today, the Fed, as I said, I have to tape this a little earlier so trying to hold off as long as I can. But the big takeaway is the Fed, the Fed meeting, the interest rate rise as expected was 75 basis points, which brings the Fed funds rate to, I know numbers are tough on audio, 2.25 to 2.50. So, two and a quarter to 2.5%. For what it’s worth, and it’s not really that important, just fun to point out. It was a unanimous everybody. The pointy shoes, suit and tie, most smartest, brilliance people in the room agreed for whatever that’s worth to raise it by 75 basis points because they think that’s best for the economy.

Daniel Creech: Nothing there, they didn’t change a whole lot of language in the statement to follow that. The reading comes out or, excuse me, the announcement comes out at two o’clock followed by the Q&A and press conference at 2:30 Eastern Time. What was interesting, and I was taking some notes and trying to do this on the fly, because I was watching the stock market, and the stock market was having a fine day. It was at least positive, it was fluctuating around a little bit, but boy, it really started to take off during Powell’s conference.

Daniel Creech: So, if you pull up daily charts, and I don’t care if you’re looking at the Dow, the S&P 500, or the NASDAQ, but just know easier money policies or less hawkish lower interest rate environments are good for growth stocks. Frank and I have talked about that. Frank’s done an excellent job explaining that over some time. And the market has been anticipating, as we’ve talked about, when will the Fed pauses or hint at cutting rates? Frank’s has talked a lot about and done some great research and backed it up on why you want to be long going into the September meeting because the Federal Reserve could either pause or raise by a smaller amount than the 75 basis points.

Daniel Creech: Its done. Now back-to-back meetings, I believe that’s the first time they’ve done… Well, I know it’s the first time they’ve done that a long time, because the 75 basis point increased last meeting was the largest since like ’94 or something ridiculous. But Powell came out and said some of the typical what you would kind of expect him to say. He’s done a very good job in the sense of trying to steer the market and be transparent. I must be in a good mood today, I’m being awful nice to these Fed members, which you know, regular listeners, I’m not fond of because of the job that they do, and the responsibility that they hold.

Daniel Creech: But overall, I have to admit he’s done a good job of trying to tell the markets and Wall Street what to expect, that they’re going to be data-dependent. He signaled higher interest rate hikes coming in the past meetings. The market sold off hard over that over the last several months as he’s hinted this. They haven’t done anything too crazy on the shock side, but he has said a couple of different things in this recent press conference that I want to highlight because going forward, it’ll have more of an impact in future meetings.

Daniel Creech: He signals that they’re not going to be as transparent or try to tell you exactly what they’re doing. However, all that is beside the point because markets are in rally mode, the Dow went up over a percent. The NASDAQ was up over 3%, damn near four. Gold even rallied a little bit, gold, people. If gold starts to rally in this environment, who knows what’s going on because it’s been absolutely getting smacked. I’ve been wrong on that.

Daniel Creech: Bitcoin is like out of a cannon, it popped seven, 8%. We’ll see where everything kind of dies down later tonight. Obviously, there’s a lot of trading left for the week and things of that nature, but Fed Chair Powell said… If I was introducing him at like the WWE main event or something like that, he’d have to have a good stock market name. Stock market bull, as I open the show with, that’s decent, I guess, but not permeable. But man, I’m telling you, he can move markets, and he’s making some people money, and that’s good. Hopefully, you’re contributing as well, which is why you have exposure to this market.

Daniel Creech: A couple of his comments that stood out to me. He is committed to bringing down inflation, and they have the tools to do so. Meaning, interest rates and the printing press between Willy Wonka and the Wizard of Oz that he has is little hands on. Labor market is tight. “Inflation is much too high, much too high,” he says. Ongoing increases will be appropriate. So that signals, “Hey, we’re going to continue to raise rates.” So that, to me, reading through the tea leaves here and in between the lines as a young amateur learning analyst, we’ll have some tongue-in-cheek joke with that.

Daniel Creech: Is that takes off the pauses in September as far as there’s no rate hikes, depending on the data. Now, remember we have there’s eight weeks in between the next meeting, give or take, because they don’t meet again until September. And if you’re scratching your head and looking at, if you can read a calendar correctly, you can and you are smart enough. Those lazy suits just take the month of August off. It’s hot, it’s humid. By the way, August is rough. There’s a lot of birthdays in August. My parents both are an August birthday so that’s exciting.

Daniel Creech: But I’ve lived in a handful of different states and August for whatever reason is tough. It’s not really nice anywhere to my knowledge. So, let me know if you know of a place you can escape in August, but maybe the Fed’s do, and that’s why they don’t work during it. Moving on. Spending has dropped. You’re seeing economic slowdown, higher mortgage rates are affecting housing. This is all good news because their goal is and what they have to do is slow the economy. Price of interest rates increases are going to further depend on data. And then he said this, he left the door open and window open for slowing down interest rate hikes.

Daniel Creech: And he said, “75 basis points,” like they’ve done the last two meetings now, “May be used again, but we’re going to look at the data.” And that hint on possibly lowering it to, because now lowering the future raises from say 75 basis points to maybe 50 half of a percent or even 25 basis points a quarter of a percent. And they were talking about, “Hey, the Fed funds right now between two and a quarter and two and a half.” By the end of the year, some projections, even some of theirs at the Fed, which they’ll have to update in September. So, we got to take a lot of this with a grain of salt, may be about a percent higher than that.

Daniel Creech: Well, you have September and November and December meetings coming up. If you only have to go another percent total, you can split that up with a couple. Well, you can split that up in different ways. The point is that if you start to get less than the 75 we’ve had back-to-back, that’s going to be a tailwind for risk assets. Meaning, things are going to be better and money is going to, and inflation will at least slow or be more tame and not continue trajectory. It’s higher and higher and higher, that’s the big negative there.

Daniel Creech: When the market got wind of that during the Q&A, that’s when assets really took off. So, pull up a chart of anything, and once you see the initial spike, that is why because Fed, Powell left that open to say, “We can slow the increase of rate hikes going forward.” And that is a positive for risk assets. Now we can’t say he is correct yet, but that’s why Frank has been bullish, especially over the last several weeks in small caps particular. But because if you just look at the data coming down, we’ll get to that in a minute, but interest rates and such the Fed’s going to have to reverse or pause, and this is kind of the beginning of that. We’ll see how it plays out, but this is a good start to that, and that thesis.

Daniel Creech: Now the question, the Q&A more than one, you can’t blame the reporters for trying to do this. They’re just doing their job. They have a job to do. They got to write about something. In news of 24/7, you have to have talking points and different things of that nature. So, everybody wanted to try to play a drinking game with the word recession, in my opinion. So, if we get Powell to say recession, we could take shots every time of it, bourbon or tequila, whatever your fix is, that would be a lot of fun. But he avoided it, and he was professional about it. He did say that he didn’t think or feel like the US economy is in a recession right now.

Daniel Creech: And he talked about, “Listen, you have a strong labor market. You have strong wages.” He says, “When you create 2.7 million jobs through this year, looking at the data, that doesn’t sound like a recession.” The economy is doing well, strong wages, but it’s not keeping up with inflation, but that’s okay. Because this is a marketing thing you want to know, “Hey, if you hit the recession, what does that mean? Does that impact the Fed’s decision on the pace of interest rate hikes?”

Daniel Creech: If we technically are in a recession, which we’ll find out tomorrow with the GDP, will that play an impact on their decision to either pauses, or they’re not talking about cutting rates yet, but the rate at which they will increase them. So, that’s a big deal as well. Overall, and then last, what he did say that caught my attention as well in addition to leaving the door open for slower rate hikes is he talked about not being as transparent going forward with basically trying to foreshadow exactly the rate hike.

Daniel Creech: Maybe he’ll give a range and say, “Hey, we’re going to go between 25 basis points and 50 or 75 at the next couple of meetings.” That was interesting to me because you can tell he’s trying to kind of wean off the drug addict that the stock market is to the Fed right now. And for good reason, right? I mean, the Fed has juiced to economy on paper, the stock market for over a decade now, and they’re just been reversing course and raising rates. I do have to give him a little bit of credit for trying to do that. We’ll see how that moves going forward. Because again, and he acknowledged this, they don’t meet next month and September, between now and September, they’re going to have a couple more readings on inflation. They’re going to have more jobs data. They’re going to have other economic data to go off of. And he’s still sticking to the data-dependent, and that’s a good thing.

Daniel Creech: Overall, it wasn’t a shock on the 75 basis point raise. I was surprised that he’s trying to say that he’s going to be less transparent, that stood out to me most. We can talk about this more when Frank gets back next week, we can get his taken things. But make no distinction here or error, the market is liking what they hear. Markets are rallying off this, Bitcoin is rallying off this, and that’s what you want to pay attention to. Because there’s just so much debt and so much negativity going on with inflation that nobody wants to have the finger pointed at them and blamed.

Daniel Creech: I understand politics aren’t completely involved in, well, I think they are completely involved. I know nobody likes to really hear that. But my point is that depending on the interest rate, let’s see, you have an election coming up in November, and don’t think that’s not going to play in a part to raising either by 50 or 25, or the comments he’s going to make going forward into an election year. Just take that with a grain of salt, like we need to take everything else.

Daniel Creech: The markets are rally. Life is good. Enjoy that. I’m going to use this as a transition here because he was talking about the data that’s going to come between now and the next meeting in September, the inflation CPI, core inflation, all that kind of stuff. But he mentioned that, “Hey, commodities are coming down and have coming down recently.” And Frank has done a good job about highlighting this in the past as well. You look at crude oil, which if we bring up, do this on the fly a little bit. Just over the last month, and this is Brent Crude, but it’s gone from basically 120 down to 100. Now it’s hovering about 107.

Daniel Creech: Natural gas is really the negative or the eyesore there. And a lot of that is, let me pull this up, sorry. And a lot of that is due because sanctions and different things over in Russia, taking their oil and gas off Europe is just shooting themselves in a foot with trying to get off of reliance of Russia there. And they just don’t have the tools to replace it, which is why you’re seeing prices sky high. We’ve had some incidences here, LNG, there’s been some fires and different things at… Pull it up here. Some delays and infrastructure problems that has caused that price hike as well. So, it’s not all the sanctions, it’s not all just one thing, but natural gas has been continued to be higher. It’s actually ramping up, but gasoline has come down.

Daniel Creech: We saw the White House taking a victory lap the other day via Twitter about how gas is down 40 and 50 cents. And I will say, hey, it’s good. The lower, the better. I just think that we should put policies in place to lower it like it used to be because we can and we have, we’ve already done it. It’s not like it’s an equation that hasn’t been solved yet or a problem that doesn’t have a solution that literally is painted across billboards and flashing lights. It’s easy to see. That’s neither here nor there.

Daniel Creech: The point to all this is the commodity prices have come down, but now some of them are starting to creep back up. However, those are all lagging. So, in next month’s readings of different inflation, we’ll see some effects and more than likely it’ll come down. Of course, if it doesn’t come down, if somehow inflation is higher month-over-month than the last reading we got at 9.1%, all bets are off, and markets are going to go way down. The Fed will be forced to raise rates significantly and even in a faster pace. But the odds of that happening because of commodity prices and such coming down are very, very low. So, that’s very bullish for the stock market in general.

Daniel Creech: Now, in addition to the lower, I want to point out a couple of things on commodity because in the short-term, I’ve been wrong on oil because I’ve been bullish on it. And so even though it’s come back lately, and we got stopped out of Viper Energy in The Dollar Stock Club, that was frustrating. And now that oil’s coming back a little bit because the fundamental issues behind the commodity prices like oil, like natural gas, like coal are driven by politics. And that’s why you need to pay attention because natural gas prices shouldn’t be near as high as they are. But hey, you can argue that’s a price worth paying because Russia invaded Ukraine, and we ought to sanction them, and try to cut them off of the world.

Daniel Creech: I’m not disagreeing. I’m not pointing that out, good or bad. I’m simply saying what’s going on. But last weekend there was an interesting article in the Wall Street journal about steel makers shake off economic concerns. And even though prices are down, the main takeaway here is that CEOs are still bullish. Now it’s part of their job, and I’m not saying they’re all cheerleaders, but you ought to be bullish for your own company. You don’t want to lie, and you don’t want to mislead people, obviously. Not all times are good. Sometimes, you go through economic downturns. Recessions aren’t the end of the world.

Daniel Creech: And as long as you can stay afloat and don’t go out of business, the strong survive and thrive, of course, but US steel companies are ramping up investments and new mills and side businesses, brushing aside signs of weakness in the broader economy and executives cited strengthening demand from customers in auto and construction sectors. Now we have this, if you think about this in a great big T-chart, good and bad on the economy. We’re always going to have mixed signals because while a rising tide lifts all boats, you’re always going to have some standouts, good and bad.

Daniel Creech: And one of the difficult things right now from an investing standpoint or an investor standpoint is you’re going to hear good and bad all the time. And a lot of times that can lead to inaction or maybe just keep all your money on the sidelines. Don’t let the negative headlines scare you completely to cash. And again, I’m talking about investing, not trading. If you’re a trader, that’s a completely different ballpark, a different arena, different jerseys, different colors, all that kinds of stuff. That’s totally different from what I’m talking about.

Daniel Creech: Investing is over the longer-term. And I’m not saying longer term in the sense of, “Oh, well, I’m early, I’ve been wrong so give me five years or give me 10 years.” I’m taking a cheap shot here. But Cathie Wood of ARK Investments, her continuation of five years, and five years… And five years, we expect this. At some point, it’s got to go to four years. I mean, she’s basically been saying that for over a year now. Anyway, I don’t want to get off on that, and she’s not here to defend herself.

Daniel Creech: My point is that investing, you want to look over the long-term. So, even though I’ve been wrong, dead wrong in the short-term of oil prices, I still think it’s good to have exposure to the oil and gas sector. And this commodity here, we’re talking about steel makers. I just wanted to highlight a couple more things from here. After steel prices rose sharply in the spring because of the war in Ukraine, prices have retreated in recent weeks. Steel executives still say demand isn’t deteriorating.

Daniel Creech: And they pull some quotes from steel Dynamics and Nucor, “But Nucor has warehouses, data centers, and other commercial buildings are driving demand for more steel. Non-residential construction,” like I just mentioned, “Has been one of the most resilient markets,” Nucor’s vice president said. “We would expect that to continue in 2023.” Again, nothing wrong with being a glass half full type guy. But here is a steel manufacturing company talking to you about stronger demand going for next year.

Daniel Creech: The takeaway from that is when you hear, when you see short-term pain, Nucor, Steel Dynamics because of the pullback in prices recently, there’s stock pullback too. I mean, if we look at a chart, let’s see, March, April. April to May-ish Nucor Corporation was around $175 a share. It dipped down to, let’s call it, 100. I mean, I’m exaggerating a little bit. It’s probably 105, and now it’s closer to 130.

Daniel Creech: But the takeaway here is, when you’re listening to analysts or doing your own research, you want to do more work and more research when prices are falling, not when things are going up. That’s the best simplest takeaway I can give. And from real quick here personally, this bear market, this market crash that we’ve had, however you want to describe it, indexes are down anywhere from 10 to 30% across the board, or they were just a month ago. Coming out of this, that’s when your good investors are always going to make their name or make better returns coming out of or during bear markets. And that’s what you want to think about.

Daniel Creech: And hopefully, that lesson’s getting across now because I want to use this as an example, this Nucor Corporation is talking about demand for 2023. And steel, let’s see, “Steel Dynamics, fabrication unit, which produces building products was nearly,” this is for the quarterly revenue, “$600 million.” That’s up from 28.4 million earlier this year, or a year earlier, year-over-year, excuse me. Take that with a grain of salt because coming out of the coronavirus and lockdowns and things like that, the economy, so some of these are a little skewed.

Daniel Creech: But then, of course, this is last week. Steel Dynamics and Nucor, both fallen over 25% in three months. And Cleveland-Cliffs was down 46%. However, Cleveland-Cliffs CEO on Friday played down the threat of a recession and higher interest rates weighing on auto demand, arguing that supply chain problems from COVID-19-related outages over the past two years have left vehicle markets under supply. Now, listen to this stat from him. This is still the Cleveland-Cliffs CEO.

Daniel Creech: “The automobile, automotive industry could have produced 8 million to 10 million more vehicles than they actually did over the past two years, pent-up demand, cars, trucks, and SUVs has developed.” Now, a lot of that is because the chip sector, and Frank has talked a lot about that, but that is a wild number if depending on interest rates, like I said, that just doesn’t mean that eight to 10 million are going to be bought right away. But that’s something interesting to take away from a steel company and where they’re seeing more demand or continued demand to help their businesses.

Daniel Creech: What I really like here is the non-residential construction that Nucor talked about and in going into 2023. That’s impressive, and you want to pay attention to that. Now, natural gas prices have continued to soar. And why? Because natural gas prices affect a lot of industry. And I’m talking about making fertilizers, steel, cements, plastics, glass, all that kind of stuff. And coal like gas in high demand, and Arch Coal reports on Thursday, which is going to be interesting to see. And the other coal because what you have there is a lot of power plants and such can switch. If natural gas starts to spike, then they switch over to coal to get their product finished and et cetera, keep the lights on.

Daniel Creech: Well, we’ve taken about a third of coal out of production basically over the last several years. There’s under-investment in there because you’re not going to get businesses to invest in it more when the government’s trying to get you off of it. So now, it’s not just as easy to switch from natural gas to coal because of the huge run-up in coal because of lack of investment and strong demand. Sorry, the fire at Freeport, LNG’s in Houston knocked off, that caused prices to spike as well because they thought, “Hey, prices are going to stay…” Or, excuse me, a lot of the exports that would go overseas were going to stay domestically here in the us, which would help draw down, bring down natural gas prices would cause them to fall.

Daniel Creech: However, since it’s been so hot, oh boy, here’s a ticket for global warming people. Because it’s been so hot, the demand has been so strong. Now let me, without being a scientist or anything, you don’t have to be qualified, you don’t have to have a white coat or a doctorate or a PhD to tell you this. You want to know why it’s a hot right now everywhere? Take a moment. I’ll give you two more seconds. It’s summertime. All right, moving on.

Daniel Creech: So, the natural gas prices continue spike, and that’s going to weigh on everything from manufacturing in that sector entirely. Now, why do I tell you all this? I tell you all this because prices of commodities like natural gas and oil are going to either stay high or continue higher over the medium to long-term. And when I say that, I mean a couple years, or until politics and policy change. Those odds of that happening are not good right now. So, that’s why you want exposure to that. I know it’s going to be volatile.

Daniel Creech: I’m sure some of you are yelling at me if you bought oil stocks a couple months ago. They’ve turned around, they’re starting to come back now, but I’m telling you want to pay attention to what the CEOs are telling you, couple that with economic environment, and if demand continues to stay strong outside of a full-blown, terrible recession where the brakes are just screeched, come to a screeching halt, commodity prices are going to go higher, and you want to be involved on the owner-operator side of those oil and gas companies.

Daniel Creech: All right, this has been a lot of fun as always. This is just the funnest thing I get to do. I can’t believe I actually get paid to do this. It’s exciting. And I appreciate you all for tuning in and supporting us. Please give me your feedback again. Good or bad. Write me, just don’t ignore me. daniel@curzioresearch.com. That’s daniel@curzioresearch.com. Have a wonderful weekend. Paying subscribers, I will be doing Frankly Speaking. And then, we will talk to you back next week with the one and only Frank Curzio, when he gets back for Wednesday’s podcast. Cheers.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decision solely on this broadcast. Remember, it’s your money and your responsibility.

Avatar photo
Daniel Creech is a Curzio Research analyst with over a decade of experience. He writes on macro trends, large- and small-cap stocks, and digital securities. He’s a regular contributor to Wall Street Unplugged, Curzio Crypto, Curzio Research Advisory, and The Dollar Stock Club.

Editor’s note:

Frank believes small caps are setting up for a huge rally…

And with Curzio Venture Opportunities, you get access to his favorites, ranging from inflation-ready sectors like energy and healthcare… to massive trends like biotech and drones.

Frank has used his small-cap strategy to 35x his money in the past…

And if he’s right about the coming rally, this same strategy could hand you similar gains in a matter of months.

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