Is the Rally Behind Us? And Did Biden’s Latest Blunder Derail Progress With China? 6/21/23

0:28Right now on Fast, so much for a pause. surging back above 30 ,000, jumping nearly 15 % in just the last two days. What's behind the revival and can it last? We'll debate that. I'm Melissa Lee. This is Fast Money. We're live at the NASDAQ MarketSite on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. We start off by the third straight down day for stocks. The NASDAQ leading the losses seeing its worst day in two weeks. The S &P 500 also closing lower along with the Dow. Fed chair Jerome Powell warning that the central bank has a, quote, long way to go to fight inflation, signaling there are more rate hikes in store.

0:59So should investors take Powell at his word? And if so, does that mean we could be in for a longer cooling off period, Tim? Well, I think Powell ultimately can't help himself to be dovish. And I think today was not a big surprise relative to what we got last week. I also don't think that the market was selling off on Powell. I think the market's selling off on positioning. That's gotten really extreme. I mean, and interesting because the VIX fell 5 % today on a down day. We've had this conversation on the desk, and it's a conversation I've had with different people around the street, which is that hedge funds have been bringing the gross down, which means they've been selling popular longs and they've been covering popular shorts.

1:37Some could argue that's part of the reason the market seems like it's broadening. And it also just explains why you actually see volatility going lower. I'm sure one of the option gurus, Dan, here has some views on what it means in terms of volatility. But to me, sentiment and momentum indicators certainly favor that equities have a place to pull back here. You also have a market which doesn't really believe that we're going into recession. There's no way stocks could be pricing in recession here is my view. And I think that's part of where we are. I just ultimately think it gets back to the market that we have in front of us and the market we have in front of us.

2:10Today was a day and I'll oversimplify it. And this isn't right to oversimplify it. But at least until semis start really underperforming cues or the Nasdaq 100 which really starts to underperform the S &P, then I think the market's going to continue to go higher. Today was a day when semis really underperformed the Nasdaq, which really underperformed the S &P. We haven't had a lot of that until that trend changes. I think the market's going to continue to stay high. Yeah. You know, we were talking on our call earlier today and old Fast Money friend, remember Larry McDonald, Barrett Trapp's report.

2:41He had a note out talking about the confluence of passive investing, which is something that we've talked a lot about, but then also these zero days to expiration options and how vol dampening that combination has been. But it also sets up for a very difficult sort of environment if everyone heads for the door at one time. We did see that today in a handful of names that have been very popular. You know, Tim just mentioned the semis. I know we're going to hit those a bit later. And I guess the thing that's kind of interesting to me is that, you know, in 2023, we've actually almost had the inverse of what we had in 2022.

3:13Like, I don't think there were too many days last year where we felt there was too much selling panic. Maybe that day in October, right, where we had that huge down day, new 52-week lows, big reversal. And then we just didn't have a lot of panic in the market. Where did the VIX get its height? You know what I'm saying? So right now, it seems like we're just lulled to sleep right here. And so it goes back to some of the concentration. Tim just mentioned the broadening out of the market. I think that's something that a lot of bulls have kind of pointed to. I don't really see it. I don't see it in health care.

3:42I don't see it in energy. I don't see it in financials. I don't see it in a lot of groups right here. So I still see a lot of risk in about 10 names that make up 25 percent of the S &P 500 and about 50 percent of the Nasdaq 100. And that continues to actually have risk as it relates to any deceleration and some of the excitement that we've seen around this AI stuff. That could be coming to a theater near you when we get Q3 guidance in a month or so. I can totally see the whole positioning sort of argument. But at the same time, I think Powell sort of really doubled down on some notions that he didn't have to.

4:12He didn't have to go to he's committed to 2 % as the target. 2 % is a long way from here. And if there was ever a hope of some sort of rate cut, I mean, he really twisted the knife in that notion. I mean, it is gone, I think. So he really went out. Twisted the knife. I don't know. I mean, it was sort of dead before, but now it seems to be really, really dead. Wednesday? Oh, yeah. It's for a holiday. Yeah, yeah. But, you know, I thought he really went to places he didn't have to go, in other words. I agree. I think part of the pivot, which I mean, not pivot, pause, which I actually don't think they needed to do or should have done, was to just, all right, we'll just take a little breath here and we don't need to do anything.

4:55He didn't need to say that. I think he could have still been hawkish and say, you know, data will continue to tell us what to do, but it would seem we have a ways to go. Something like that. I think we'll see inflation continue to moderate, but we're still really far away from where he needs to be. I do think we're in this lull in the market. We don't really have a ton of earnings news. We don't have a Fed decision yet. We're probably just back and forth for a while until we start to see bank earnings. And that's July 14th. I think JP Morgan starts bank earnings. Then we'll get a sense on not just what banks are doing, but on the economy and what they're seeing.

5:33And I actually think it's going to be OK. So we're in a vacuum, Guy. So what'd you make of today's action? Being in a vacuum, you know, have you ever turned on that vacuum? I mean, they never smell particularly good. So I personally don't want to be in a vacuum. It sucks up dirt. What do you expect it to smell like? Well, that's an excellent point by you. Today's action makes sense to me. I mean, it makes a lot. You know, Rafael Bostic from the Atlanta Fed, non-voting member, by the way. I mean, he came out, I think it was today, and said, don't expect any cuts for the majority of 2024. I mean, that flies in the face of a lot of what the market's been talking about recently.

6:10And I think, listen, I don't know this. I'm sure Steve has an inkling for sure. But I actually think the Fed is looking at the stock market and is speaking specifically to the stock market when they say, you know, I'm paraphrasing. I'm not sure what you're looking at, but rates are going to stay elevated for a longer period of time. And you guys and gals better wake up to that fact. So the last three days clearly makes sense to me because I've been bearish for the better part of the year. So we'll see if this continues. But Tim's point about the VIX is spot on. Dan's explanation spot on as well.

6:41Something's got to give here for sure. Let's dive into Fed Chair Powell's latest comments and more with our own Steve Leisman. You've been listening in on our conversation, Steve. What did you make of his comments today? You know, I think you guys have it exactly right. He fairly explicitly endorsed two more rate hikes in day one of these two days of congressional testimony. He said a majority of Fed officials have forecast at least two hikes. That's two thirds of the committee. And he did say decisions are going to be made meeting by meeting. But he said it's a pretty good guess that the Fed's going to be hiking 50 more basis points.

7:1816 of the 18 participants on the FOMC wrote down that they do believe it'll be appropriate to raise rates and a big majority believes raise rates twice this year and you know I think that's that's a pretty good guess of what will happen if the economy performs about as expected. Powell emphasized though the feds in no hurry to hike like at sequential meetings as it was doing it with 75 basis point increments back in the summer. The speed is now less important than the level, he said. He said inflation has moderated somewhat, but still has a long way to go to get to the Fed's 2 % target. On the economy, he said it's slowed significantly since last year, but now expanding at a modest pace.

7:58Consumers picked up, but housing is weak. Higher rates are slowing business investment, and the labor market remains very tight. As Guy was talking about two Fed presidents weighing in with a more dovish outlook, Atlanta Fed President Rafael Bostock and Chicago Fed President Austin Gillsby, both putting themselves in the wait-and-see camp, noting that the Fed had done a lot and they both wanted more data on inflation and the economy before deciding what to do in July. Melissa? Steve, I'm curious, when he said and talked about speed, and speed's not very important as it was before, it almost seemed like he was laying the groundwork for a potential longer period in which they are going to wait and see.

8:38So it could be you know, be on to. And it could be into next year. I mean, I don't know. It seemed like he opened the door to that by saying speed is not important right now. Yeah, I think that at least creates an every other meeting type of pattern rather than every meeting. But it could go on even longer. I mean, there are people out there that are saying six percent. And the question I have, Melissa, which is when I look at the way the futures market, the Fed funds futures market is priced right now, that next hike is priced in. But the second hike is not. And I just wonder if it has paid for folks to fight the Fed over time.

9:20If you go back to when Powell made that big pivot back in November 2021, essentially the market is still down like 14 percent since then. The market's been fighting the Fed the whole time with a different outlook on inflation, with a different outlook on rates. And I'm not sure it's paid to do that. Guy, you got a question? I do, Steve. I look at the yield curve pretty simplistically, but I'm curious to what you think and maybe what the Fed thinks. It means two tens went out to 110 basis points, came back to 40 relatively quickly. Here we are sitting here, either side of 92, 93 points inverted, I think headed back north of 1%.

10:01You know, people seem to discount at this time, but we've been inverted for quite some time. We're probably at levels we haven't seen in 40 odd years. Do they look at that? And what do you think it means? They look at it, but they're more interested in the three month, two year inversion, which is out there. They don't think the market knows a whole lot or anybody knows a whole lot about what's going to happen in 10 years. And they don't think that's a strong signal. They think a stronger signal, based on a paper written by one of the Federal Reserve banks, is in that nearer term inversion, which tells you, I think, right now that the market thinks the Fed is not far away from cutting.

10:37And by the way, the Fed itself has cuts built in for next year. So for sure we're nearer the end of the cycle as the Fed believes it right now. But the question is, where is that end and what it means for the economy and stocks? There are those who think that the Fed is not going to stop until something breaks. And the only sign that it will really have had a significant effect on the economy to bring down inflation is something like the labor market breaking or something like the stock market, along with perhaps the stock market selling off or some big decline in earnings. I don't know that the Fed is satisfied with the numbers that would be put off by a soft landing.

11:18I would love to have one. But if you don't get the inflation reaction, the Fed, I don't think, is going to stop. I just want to follow up on that point. So if the Fed actually is thinking they're going to do some cuts next year, where do they think that inflation has to be to get to that? Can't be. I mean, it could be, too, but this seems like we are so far from two. He just said two today. I know, but is that real? He said two. You don't change now. Steve? No, no, nobody. Nobody thinks we're going to two next year. The best, most optimistic outlook is two in 2025. They think it gets into the threes next year in terms of the core rate.

11:59So they think it's a slow process and they're happy. Remember, and Bostick said this today, that there's a thing that which Bostick calls passive tightening, which is this. as the inflation rate comes down and the Fed interest rate remains the same, the real rate becomes more restrictive. So, for example, if you have a 5 percent inflation rate and a 5 percent funds rate, you're at zero. But if you have a 4 percent inflation rate and a 5 percent funds rate, all of a sudden you're at positive real 1 percent. All right. How's that for quick math on national television? That's excellent. And the hand gesture, that really helped us too.

12:36Steve, thank you. Steve Leisman. A couple things here, real quickly. So David Rosenberg, Rosenberg Research this morning, he had a note out saying 90 % of the time during rate hiking cycles that the stock market rallies into it. It's not until after they're done that it starts to sell off, which I think is really interesting. Into the cycle or through the cycle? Through the cycle. Through the cycle. And it starts selling off afterwards. And what Steve just said, that quick math, I can do some quick math too. The Fed funds rate back in 2018, remember the last time Powell was raising, got to about 2.5%, okay?

13:04And we knew that inflation was 2%. So what was the real rate, Tim? Real quickly, real quickly, 1.5%. No, 50 basis points. Was it 2.5 %? Well, it got to 2.5%. I thought you could do math. Oh, sorry, sorry, sorry, sorry. So the point was, it was, all right, sorry, sorry. It was very, you know what I was thinking of? You know where the 10-year got to 3.25%. Okay. So it was very accommodative still. Now, but the stock market dropped 20%, right? As soon as we had a little bit of a growth scare. And I think that's really important to think about because we're talking about a three-day sell-off about 1.5%.

13:35And this is, you know, like the longest sell-off that we've had in a month and a half. The last thing I'll say about the banks that you just mentioned before, did you guys see all the regional banks? They all guided down for the quarter here. So like if you talk about, and you could say that's very specific to them, but I keep hearing stories and I think we're going to hear more and more where these REITs are going to be turning the keys in to the banks, okay? And where, who owns all that paper? It's the regional banks. So I just feel like the back half of this year is not going to be nearly as rosy or just going to pay attention to things that the stock market doesn't seem to care about right now.

14:05In the meantime, though, I mean, even though it's been three straight days of losses for the markets, we're still up at. Well, Apple's at all time highs. But I don't think anybody's questioning. Maybe I'm wrong, but most people assume we're having a recession. The question is how shallow. Sabina said they think 0.8 percent. But to assume that the Fed can tighten sufficiently to get down to 2 percent. First of all, when core inflation has been stuck at 5.3 for nine months now and not take the economy deep into recession is naive. It's just there's no way we can do it. Meanwhile, if you think about the recession we should have had during covid, which we didn't have because we threw so much M2 at the problem and you're now trying to.

14:46It just the question really is, is how much should stocks begin to price in recession? And they haven't priced in much. Yeah. For more on all this, let's bring in Joe Livornia of SMBC, NICO Securities America. He was formerly the chief economist for the National Economic Council. Joe, always great to see you. If the inflation target really is 2 percent and remains 2 percent, does that mean that we have to have a recession? No. I mean, listening to when Karen asked Steve about, you know, would they cut with inflation still above 2? My answer is yes. It depends really on the unemployment rate. And in the Fed's forecast, which showed 2 percent core inflation in 25, they've got their unemployment rate well above 4%.

15:26They lowered it from where it had been, but it's still well above 4. I think it peaks at like 4.3 or 4.5, somewhere around there. That would be consistent with recession. So I would argue if the labor market weakens in the next few months and we see that rate move up above 4, we'll have a recession because we know historically, going back to data to Second World War, when the unemployment rate rises 50 basis points from its low, we've always had a downturn. And my guess is when that happens, when the Fed actually sees it, they will pivot, meaning they will focus on the unemployment rate, which is a leading indicator of inflation.

15:58And they won't worry about where the inflation rate is at that point in time. So it sounds like you think there will be a recession, but then in response to recession, the Fed will quickly pivot. So that brings into the picture a rate cut, if pivot means cut, this year. Yes. Yes. I mean, I remember in 07, we at the time thought the economy is very weak. There was excess housing leverage, excess allocation of capital to housing. And the Fed wound up pivoting very quickly, basically within three days in August of 07. They wound up cutting 100 basis points for the year. So if, again, this is the if, if the labor market breaks, and we'll get some data tomorrow, Melissa, that cover claims for the survey week, and they've been edging up, very gradual, but edging up.

16:39If we get some weak employment data in the next few months, and we're due for it, we've had, I think, 14 consecutive of months where the street has underestimated payrolls, it's a record long in terms of length, then I think things can happen very quickly. And you actually could see the Fed cut this year. So I would not rule that rate cut out. Absolutely not. Joe, it's Karen. Let me ask something. You talked about a 50 basis point increase in the unemployment rate triggering a recession. But has it ever been a 50 basis point increase with a base as low, with a unemployment rate as low as it is now.

17:10Yes. Yes. We've had the unemployment rate actually a couple of times below where it is now. We've had one time around two and a half percent in the 50s and went up well over six. So, yes, it doesn't really matter where it's starting, where it goes, where it rises is going to be partly a function, Karen, of how deep the recession is. And the reality is whenever the next recession happens, we really have no idea if it's going to be deep or shallow. There's no shit it's going to be shallow. I'm not sure what it's predicated on. We thought when the economy, I say we collectively when the recession hit in 08, it was going to be shallow.

17:42In fact, the economy even grew almost two and a half percent in the second quarter of 08. Whether it's shallow or not will depend in part on what the Fed reaction function is to the economy at that time. And my guess is with the election next year, fiscal policy is messy as it is right now. You're going to get no fiscal relief. So when it comes, it could be a deep recession. Joe, you're unlike many economists and you're meaning you're cool because you like Van Halen. But most economists aren't able to predict or even get out there and predict where the economy is going. Why I connected these two, I just wanted to point out that I met you at a Van Halen concert once.

18:17I do love Van Halen. I wouldn't like. I'd say I love. You love Van Halen. I don't love that economists never seem to be willing to get out there and anticipate where the economy is going. And I don't mean you. Maybe I'm really talking about the Fed. If we all know that labor is going to slow, we all know the economy is slowing. Why can't the Fed say, I think the economy is going to be here in six months, so I'll take policy there right now? Why are we so data dependent? Why are we waiting on a lag we all know is there? The answer is, Tim, it's political, I think. And one of the reasons that Chair Powell, I think he made a commitment to the president to get inflation down.

18:52And again, it's a forecast that the rate now it's up 3-4 to 3-7. History would say if it goes to 4-0, you're going to have a recession, you'd be in recession. So I think it's that commitment to get inflation down and the uncertainty that it's a forecast. It doesn't you know, it's a forecast means it's it may not happen. And to me, that's why Jay Powell has done what he's done. And they really want to see more evidence that they need to be where they want to be. But, Tim, this is also the litany or the history of the Fed. The Fed always overdoes it. And this would be yet another example of the Fed overdoing it, because when it happens in real time, for whatever reason, they forget about the lags and the politics, maybe such they have to keep pushing.

19:31And it's a mistake. Joe, thanks. Always good to see you. Thanks, everybody. So Joe's basically saying, let's not believe the Fed here. He doesn't believe the Fed here. Steve was just saying Fed Funds Futures. They don't believe the Fed here. They don't believe what Jerome Powell said today on the Hill, guy. I know what you're going to say. I don't know why I go to you. You don't believe the Fed at all. Well, I mean, to stay with the theme, Jamie's been crying about higher rates for quite some time. Of course, Of course, that Jamie being Jamie Dimon. So I would listen to him. And I understand what Joe is saying.

20:05But you have to ask yourself this. How bad will things be? And again, with the rhetoric that we heard, for the Fed to be cutting rates at the back half of this year, it does not suggest that stocks will continue on their merry way. So he may be right. But if he's right, I actually fear for what the outcome is going to be in terms of the stock market. Coming up, an earnings alert on KB Home. Shares on the move after reporting results. Details on that quarter and the home building space next. Plus, chips taking a big breather after a huge run this year. Why these semi-stocks are pulling back and how you should play this space.

20:38Don't go anywhere. Fast Money is back in two.

20:46Welcome back to Fast Money Earnings Alert on KB Home. Shares of the home builder are volatile after posting both revenue and earnings beats in its latest quarter. The stock is up 65 this year, trading at its highest level since 2007. Diana Olek has got more on the company's report. Diana. Yeah, Melissa, the mantra for the builders appears to be demand. The analyst call is still going on right now. But at the top, CEO Jeff Metzger said buyers are demonstrating a higher sense of urgency than we saw earlier this year. So no surprise, KB beat nicely on the top and bottom lines. Metzger said in the release, the improvement in demand we started to see in February was sustained throughout our second quarter as we achieve monthly sequential increases in our net orders.

21:26He said they've lowered both build times and direct construction costs, but KB's gross profit margin dropped to 21 percent from 25 percent, they said, mainly due to price decreases and other homebuyer concessions, together with higher construction costs and a shift in the mix of homes delivered. Now, the average sale price dropped 3 % year over year, but the cancellation rate of 22%, it was up from 17 % a year ago, but down quarter to quarter from 36%. So there, Melissa, is your urgency right in the number. Why are construction costs higher, Diana? I would have thought that they would be lower given the decline in commodities.

22:02Was it all wage inflation? There's wage inflation, of course. that has to do with labor, but it's actually the cost of lumber came down, but the cost of other things that go into the home are still much higher. So, I mean, with the headlines sent to be lumber's down, lumber's down. But when you look at some strange things that you wouldn't think go into the home that have to do with like HVAC systems and other things are actually a lot higher. All right. Diana, thank you. Diana Olick on KB Home. Karen, you're looking at this quarter. Looked pretty good. Yeah, it actually looked pretty good. I think, I mean, Well, the gross margin being narrow with that would explain some of it.

22:36And the guide relative to the size of the beat on a revenue, which was really big, the guide sort of made it seem sort of muted for the rest of the year, although the commentary sounds pretty upbeat, actually. So there is a giant disconnect there in the whole, I don't know, not just home building, but in the whole housing market in that you have demand there, but you have this giant wrench in the system of rates being where they are. Yet houses are forming. Millennials do want to buy homes. I guess you just need some time to get used to these rates. The average contract rate of a 30-year fixed mortgage was 6.73 percent.

23:14So it didn't come down a lot at all during this quarter. I mean, that really worked against them if there was a headwind there. But 90 percent of the mortgage outstanding are probably all below 4 percent at this point. So no one's going anywhere. But yet, if you look at the recovery in the NIHB index, it's it's had the fiercest recovery over the last six months of any period other than coming out of COVID. So we've talked about the homebuilders. Guy's done a great job of flagging this a long time ago. You have a case where, first of all, the charts on these companies are extraordinary. You look at KBH, you know, somewhere around 52, 53 bucks.