Yields rise on rate hike comments 8/25/23

0:01John, thank you very much. And right now on Fast Fed Chair Powell waxing poetic saying we are navigating by the stars under cloudy skies. There's a metaphor for you. He also said inflation is too high still, and he's prepared to raise interest rates further. So why did stocks finish the week on a high note? We'll look at that. Plus, ditching the down payment, almost. Zillow testing mortgages with just 1 % down. So is this a smart way to help cash-strapped buyers or maybe another disaster in the making. And later, our chart of the week will unlace Shoemaker's epic losing streak and why it could ripple across a host of consumer stocks.

0:46Good afternoon, everybody. I'm Tyler Matheson. In for Melissa Lee, this is Fast Money, live from the NASDAQ market site. And on the desk tonight, Steve Grasso, Tim Seymour, and sitting in as our guest Trader is Stuart Kaiser, City's Head of Equity Trading Strategy. Stuart, welcome. Welcome to all of you, in fact. Good to be with you. We start with the markets and the Fed, of course. Story of the day. Stocks jumping today, despite Chair Jerome Powell's warning that more rate hikes could be ahead. How hard a warning was it? Or was it a little squishy? Treasury yields also rising. Take a look at the two-year yield surging to its highest level since the first week of July.

1:26CNBC senior economics reporter Steve Leisman is in Jackson Hole, Wyoming, a beautiful spot with all the details. Hi, Steve. Hey, Tyler, thanks a lot. You have Fed Chair Powell delivering what you could call a moderately hawkish speech in Jackson Hole here, which he said inflation was still too high, despite, by the way, recent progress that he acknowledged. And he said his choice seems to be between holding rates at a restrictive level or hiking again. We are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks. Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.

2:06We can't yet know the extent to which these lower readings will continue, or where underlying inflation will settle over coming quarters. Now markets had sold off in anticipation of the speech and in response to stronger economic growth numbers we've gotten. So equities were higher today and bonds were definitely higher as well. But the outlook for Fed rate hikes increased. Take a look here. The odds of a September rate hike remain unchanged at 20 percent. But the probabilities of a November increase past the 50 percent mark to stand around 56 percent now. Now, Powell mentioned several factors or scenarios that could lead to additional hikes.

2:44Economic growth running stronger than expected. Inflation failing to follow through on recent declines. And the labor market remaining too tight. Those are three scenarios that he suggested could lead to higher rates. But with lots of data between now and the November meeting, Powell made clear there was no decision had been made just yet. There were a few dovish remarks. Not many included comments that payroll growth had slowed significantly and that lags of previous rate hikes could yet hit the economy. But overall, the message was a Fed chair skeptical that maybe enough had been done yet to bring inflation down to target and willing to give the economy some time to prove his skepticism wrong, but kind of maybe a little itchy to hike again if inflation does not cooperate.

3:21Tyler, Steve, let me start off our little Q &A segment. I mean, it's this sounded like a kind of a I'm going to be data dependent, a phrase we've heard before. What are the data on which the Fed will be most dependent? Well, start with inflation, the PCE number, which we're going to get next week. I would be looking at the growth numbers as well. Look at the payroll numbers we'll get next week as well to see if there's that kind of loosening up. I think it's important to note, Tyler, that Powell repeated his idea from last year that bringing inflation down was going to require a period of below-trend growth.

3:57So that kind of tells you, watch GDP. The Fed chair wants inflation on GDP running below two percent because that's a place where he would feel more confident that inflation is being brought down more convincingly. So, Steve, when I heard Chairman Powell make the comment that the housing sector has picked back up again, there's two elements to the housing sector, the existing and the new home sector. Existing has been plummeting and new homes have been rising. Why are they so myopic on that when the one that is critical to rates isn't really rallying? It's a good question. I think the way to think about how the Fed thinks about housing is through the owner's equivalent rent, what the equivalent is to rent a property.

4:46They see that number coming down, inflation over time. But because, you know, new rents don't reset and new housing costs don't reset with everybody automatically, it's going to take some time to work through the index. So what he's saying is essentially we're worried it's picking back up, but we still see it coming down and lower numbers working through the index over time. But he's not going to front run those numbers coming down, Steve. So, Tim, let me turn to you as we point out that Steve Leisman is the only human being who can stay dry in a rainstorm. It's beautiful, man. Go ahead, Tim. Well, Steve, I guess my question to you is, where do we think there's dissension within this Fed?

5:26Ultimately, we've had a lot of talk over the last couple of days. This seems like a Fed that really is doing its best to stay together as a group. And there's often an undertone at other times with other Feds that we never really felt like we knew they were going. You know, Tim, I really like your question. I think I know why you're asking it, because as an investor, you want to understand the parameters of the debate at the Fed to understand where the risks are. What I can tell you is having talked to three Fed officials on the record here that the parameters of the debate are kind of on the hawkish side because your doves are those who don't necessarily want to cut right away.

6:03They just don't want to hike. They want to maintain a restrictive level. That's the dovish side. And the hawkish side is one and maybe even two more hikes among some of the most hawkish members of the Fed. That's the parameter of the debate. I have not heard anybody out there saying, either publicly or in the hallway, saying, we ought to be cutting right now. The Fed is way too tight. That's not part of the discussion. When it comes to cuts, which you'll note, Powell didn't even mention today, although some people who talked to me did talk about it. It's a next-year thing, Tim. All right, Steve, thanks very much.

6:35Hope you can get some fishing in. Maybe just starting right now is not a bad idea. If not, I hope so over the weekend. Steve Leisman, thank you. You know what they say, Tyler? Tyler, they say the fish are already wet, so it doesn't matter. The fish are already wet. That's right. Steve Leisman, thank you very much. And the Fed, of course, will closely be watching next week's key economic reports. Jobs, inflation, housing numbers. It doesn't get much bigger than that. So how could these developments move the needle for the Fed? Stuart, let's bring you in here. I mentioned to Steve it feels like this is a data-dependent Fed.

7:06What are the data? We mentioned three of them right there. Jobs, inflation, housing numbers. Those are real centers of the rodeo. Yeah, I think from our perspective, the focus is on the jobs report next week. You know, as Steve mentioned, the Fed or Chair Powell kind of repeated the message that they kind of need to see weakness in the labor market to really be convinced that there's enough tightening going through the system. Consensus. And we've seen none of that. We've seen none of it. But, you know, consensus is 170K for next Friday. That would be the lowest positive print that we've seen on payrolls since December of 2019 and the lowest print that we've seen since a negative print in December 2020.

7:42So 170 is not a weak number, but you're starting to get to the point where you're at the lower end of these positive prints that might start to concern the market a little bit on the edges. So we'll be definitely focused on payrolls as the number one indicator next week. How about inflation? Where do you think that's moving? I mean, our view is the next month or two, you can continue to have kind of an easing of inflation. similar to what we've seen recently, which is back-to-back 20, you know, sub-20 basis point prints. But our economists do expect it to kind of turn higher a little bit as we get into the end of the year.

8:11From what? Why? Like, I think you have some, the housing, you know, owner's equivalent rent has been sticky. It looks like it may kind of pick up a little bit. You know, some nuances in the data, like airfares were low last month from an inflation perspective. We expect that to kind of recover as the year goes on, just given the strength in domestic travel. So, you know, we do think you could get inflation turning higher a bit. It seems like the Fed is also concerned about that if you believe their forecast. So I guess what I would say with inflation, the next month or two is probably not going to be an issue.

8:38As you get back later into the year, it could kind of come back to people's radar, which is why the Fed wants to keep November in play. Steve was asking a question about housing. Where do you see that playing in here? I mean, you look at two dimensions of it, existing and new. Existing and new. I mean, you've got existing where people are sort of mortgage stuck. Married to the mortgage. They're frozen. And so and people are going into the new houses, which are selling quite nicely. Look, I think the concern there is you've got mortgage rates at a level we haven't seen in about 20 years. And obviously that's going to be a headwind for both of the things you described.

9:11It's hard to get out of a low-cost mortgage if you've got a refi into a higher-cost mortgage to buy a new place. And it also makes the cost of buying a new home kind of prohibitive. So that degree of tightening should be hitting the economy. But as Steve mentioned, it seems like that sort of came in and is already back on its way out. So I think the question here, from my perspective, really gets back to inflation. And you're really sort of getting out of the prime home buying and selling season as you move into the fall here, right? Right. And these are first-time home buyers predominantly because they don't have anything to sell.

9:41So it makes it more reasonable for them to enter that market. And the reason why the housing stocks have done so well is that they're buying down those mortgage rates, trying to be more competitive. But if you look at the way you started the show, you said, why did the market rally? And he sounded just as hawkish as he's ever been. If you look at it historically, the market will see the Fed level off. And then six months later, they'll do their analysis. And historically, they start cutting rates six months later. So if we give them September and even give them November, then you're looking at that first rate cut maybe in May, June, May, June.

10:16And I think that's where some of the street is right now. So if the market could see through the fog of the Fed because he can't see the stars at night, then maybe we'll see the market rally. Picking up on his lovely little metaphor there. Tim, let me turn to you. I miss you sitting here with me, Tim. I can't tell. The body language is just not the same, man. If I could hug you through the phone lines here, pal. Virtual hug. That's fine. Yeah. So so, you know, I guess I listen to all this and what I hear is the Fed's not our problem. And the Fed hasn't been our problem, I think, for for for three to six months.

10:54I think the problems are the ones that the market was expecting. Certainly economists have been expecting. But but even a lot of the faster money out there. And it explains where credit spreads and the consumer. We heard some of this this week. We're going to talk a little bit more about this later in the show. That's that. That's really what the key is. We're at peak inflation, peak Fed, peak rates for the most part. I think the two-year closing near 508 is a concern for equities. But really, we've been more fixated on the long end to do our discount rates. Bottom line here is I just think what we got out of the way today was at least some concern that the Fed could be a bigger problem than they might have been.

11:33And they haven't been. That's why the market rallied. The market sold off 5 % into this Jackson Hole. equity repositioning over the last four to five weeks has been extraordinary. We've gone from where we were in the third and fourth weeks of July to a place where I think it allows this rally. And while I'm not wildly bullish on September, I think the market's going a bit higher here. All right, interesting, Tim. Thank you very much. Well, if you are long or short the market, you can be either one. The chart master has got a way to play it both ways. For more, let's bring in Carter Worth of Worth Charting.

12:04They tell me, Carter, just to get out of the way and let you go. Take it away, my friend. Okay, well, sounds like a plan. Thanks, Tyler. Great to see you. So I thought we would look at the relationship between the QQQ and the SPY. And so we're going to look at four identical ratio charts. A ratio chart simply depicts relative performance. This is QQQ divided by SPX, and it's simply the direction of the line. It's not the scale. So there are no drawings, no lines, no annotations, no judgment. Let's put some in. And what you see on this second iteration of the identical chart is that the relative performance of the Qs to the market actually peaked in September of 2020 following COVID.

12:45So three years later, there is no outperformance at all on the part of QQQ. Another way to draw the lines, of course, would simply be to call attention to those well-defined tops. And then the final way, and this is really the important one, the uptrend, meaning Qs have been outperforming SPY for the better part of 10 months. We're now starting to break that trend as seen there in the down arrow. That's a judgment, of course, mine. I think that the underperformance continues. So if one is a pairs trader, this is simply being short QQQ, long SPY. or it's along only it's continued to reduce exposure to large super cap marquee QQQ type names.

13:32OK, so there is the trade is to short QQQ, go long SPY or at the very least to be wary of the of the super caps. Steve, reaction? Yeah, so I agree to a certain extent. I think that if you're going to play this market to rally, first of all, the top three constituents on the triple Qs and the SPY are going to be Apple, Microsoft and Amazon. And then you could further that out to Nvidia if you're looking at the SPYs. If you think the market's going to rally going to year end, you're going to have to own all of them. So it's sort of a pick your poison moment and a binary guess. I think the market's probably going to rally into year end, which favors large cap tech.

14:13That's kind of what Tim says. So what is your thinking here as you look at the themes? I know individual stocks is an area you're a little less able to talk about. But the themes that Carter and Steve just mentioned. I think it makes sense. If you saw what happened during earnings, which is stocks that beat their earnings numbers are basically flat on the day. And that just shows you that expectations have gotten quite high, especially in large-cap tech. You've also had a surge higher in interest rates. Those large-cap growth in tech stocks are very sensitive to rates. So I think those two things are what are causing that trade to kind of top out and show some weakness.

14:45If you look at how this is going to perform going into year end, effectively what you're arguing here for is a rotation. It's a rotation out of tech and into more of cyclicals. Our analysis shows that when that happens, about three quarters of the time it happens in a rising market. So what you would get is the market higher, tech higher, but these non-tech stocks may be outperforming on a relative basis a little bit. And to me, that's a less worrisome way to kind of think of that trade. The flip side of that is if you actually had that rotation happen in a down market, that would be a very, very negative outcome for markets because that would be the market lower and tech getting liquidated.

15:18That's not our base case, but that would be, I think, the really negative takeaway from that chart. The positive takeaway would be high expectations. This stuff is really outperformed. We've had a short period of rates rising, which is a bit of a headwind. But ultimately, going into the back half of the year, we should continue to perform well, tech up. But there's the potential that these higher beta cyclicals could outperform. We'll outperform a little bit. We're going to leave it there for now. We'll be right back. And, Carter, we'll see you in just a minute. Thank you, as always. We've got a lot of charts to go and a chart of the week.

15:48It's Friday. Yep, that is right. Week with an A, not E-E. We'll find out which stock caught our traders' attention next. Plus, Zillow gone wild as mortgage rates hit a 22-year high. The real estate company has a new strategy to bring in homebuyers. You won't believe this one, or maybe you will. Stick around to find out more fast money in two minutes.

16:16Oh, no. Welcome back to Fast Money. Time now for our chart of the WEAK. Shares of Nike just not doing it this week. Up today, but dropping nearly 6 % since Monday. The biggest dog in the Dow. The athletic retailer has been on a downward slump for most of August, notching an 11-day losing streak. And Tim, you've been bearish on the swoosh for a while now. Has this slide changed your mind at all? Is it getting to a point where it looks a little more attractive? It's a lot more attractive. It's down 40 percent from the earlier highs that it had last 22, down 25 percent from where we were in April.

16:55I think still expensive. I also still think that they've pulled forward a lot of sales. More than anything, I think the multiple has to come down. It has come down. But I just feel like we've we found a place where the gross margins may have peaked in the short run. And that's it. It's a fantastic company. I love Nike on it with a lot of accounts. And so tactically, this has been a directional short that makes me feel a lot better about being short discretionary, which I think has more way to go lower. Steve. So Nike, to Tim's point, started a downward trend in November of twenty twenty one. It broke out of that a year later, November 2022, started a new downward trend that that's a product of all of retail basically getting crimped here.

17:36So until this stock bottoms out, I would not be buying it. That's the obvious as a trader. But I would look for it to hold basically that September low from 2022. Nike is in part a China story, Stuart. Yeah, and I think, look, what you mentioned, I think, is really important here, which is if you believe the Fed is going to continue tightening and that's going to hurt the labor market, then consumer spending is at risk. And that's why you want to be probably cautious calling the bottom on a stock like Nike. You know, to your point on China, look, China, Nike is a brand and China consumes brands and luxury brands.

18:10So I do think there is the potential here that the stock has been under pressure because of weaker China spending, which is impacting, you know, European luxury as well. So this is a broader story that I think has U.S. consumer takeaways as well as Chinese consumer takeaways. All right. Thanks, folks. Coming up next, mortgage rates on the rise and Zillow out with a zealous program to entice homebuyers. But are they just creating the next set of real estate zombies? A lot of Zs. But no Zs around here. We're wide awake. Come on back. You're watching Fast Money Live from the NASDAQ market site in Times Square.

18:44We're back after this.

18:51Welcome back to Fast Money, everybody. Zillow launching a new program to give buyers the option of putting just 1 % down on home purchases. The financing option currently limited to buyers in Arizona who still have to meet credit and income requirements. But it comes as the 30-year fixed-rate mortgage hovers around 20-year-plus highs. Now, if Zillow keeps stringent standards, folks, is this an okay way to help buyers? or perhaps a catastrophe in the making. Steve, why don't you take the first whack? So if you look at it, they haven't given out specifics on the criteria as far as credit or income, but the numbers that have been thrown out there seem very, very low.

19:31So I don't think this is a great idea. I think Zillow, when they got into that flipping houses and they lost a ton of money a couple of years back, now this seems very promotional, very gimmicky. State in what your core competency is, and I think you'll be a better stock for it. So I don't like the idea. How about you, Tim? I don't love it. I'm long Zillow. I've been long for, I don't know, six months. I think the story is, first of all, this is a profitable company and what they do now. There's been a lot of uncertainty in the housing market. They were very cautious on their 2Q guide. If you look at their EBITDA margin, it's just under 40 percent.

20:05That's why this is an attractive company. It's actually not expensive. It's not one of these high multiple dot com companies. But as Steve pointed out, boy, they've had some missteps. I don't love this move, but I think you have to be cautious. Reactions to it? I guess it kind of worries me for two reasons. One, it really confirms the challenge that higher mortgage rates is kind of posing to the economy, the housing market. And the second is experience has sort of taught us when you get creative and aggressive on mortgage and consumer lending, it tends not to end well. So I don't have a specific you on Zillow.

20:34Just generally speaking, this kind of worries me in terms of what is this testimony or look through to the housing market. I think when you put mortgage gimmicks and Texas or Arizona together in the same sentence, you probably got a problem brewing here a little bit. Shall we go for a final trade? Let's round the horn. Let's begin with you, Tim. Well, let's go to the health care sector, which I continue to think will be very defensive. Pfizer is one of those names that's been punished. It's trading down near some support levels. even kind of pre and post pandemic. But they spent a lot of money to develop a pipeline that's more than just what they did during COVID.

21:08You got to love Pfizer here. Got to love Pfizer. You want to take it away, Grasso? Sure. Palantir was a$20 stock about 24 days ago. It sold off dramatically. I'm looking for a retracement of those levels. I'm long the name. I bought it just for pretty much a day trade, and it's winding up being a couple of day trade. But I'm looking for a pop back next week. How about you, Stuart? Final thoughts? Yeah, you know, our view here is you need to be hedging your equity exposure. And I think the number one reason for that is just the reaction to good news has been very weak and very unconvincing over the course of the last two to four weeks.

21:42You also have higher rates, a weaker China and pretty bad technical setup. So we do think it's the time to kind of protect your gains in equity markets, S &P 500 puts. Stuart, it's been great to be with you. Steve, let me let you know. What did you learn this week in the markets? I think the Fed's time is done for the moment. And it was it was either NVIDIA or the Fed. and I think they both had their 15 minutes of fame. Let's move on next week. Gentlemen, thank you very much. Great to be with you all. Have a great weekend. And you guys at home, don't go anywhere because Options Action is next.

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