This Week, It's about Inflation and Friday's PCE Report

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It's the Talking Point, it's Tuesday, May 28 and this is a shortened week, but an extraordinarily important week for the market. And the reason is... Mm hmm. It's inflation related, and that would be the Fed's preferred release of data from the personal consumption expenditures index. That's the PCE coming out on Friday. And what the market obviously wants to see and perhaps will see, is that inflation even at the margin has coming down. That it is not stalled. Keep that in mind. It could stay the same, but what the market wants to see is to show us that it is not sitting there and stalled, and not coming down at all. So if there's any sign, because remember what we do is you look at the headline, right?

Quincy Krosby:

You look year over year. You look month over month. The market wants to see whether it's core, super core that inflation is even again at the margin starting to come back down. That would be a net positive for the market. Obviously, obviously if inflation looks as if it's ramping up, then the market is going to have problems with that. So that comes on Friday and you know, before we even get to Friday, the market is going to hear from many Federal Reserve speakers yet again. And what we've heard from the Fed over the last week or so is basically that they need to stay where they are. They need to make sure that inflation does in fact sort of start to unwind and start to come down before they offer a signal to the market that they are prepared to start cutting rates. Now in the Europe, the European Central Bank has basically told the market they are going to cut at the June 6 meeting.

Quincy Krosby:

And the way that they phrase it is interesting. They say, look. We can cut at the top, a portion of restriction, right? So if you look at it, they say, no. We're not cutting and continuing to cut. Just to take it down a little bit from that upper level of restricted rates. We'll start to bring that down because they made it clear that they may not be able to continue cutting rates, but that they can at least bring it down from that upper level of higher rates. So they made it clear too that they've seen some of the wages come in a little bit stronger, but they've said, you know, we believe that's a one-off. And again, they've made it clear to the market. Don't expect that we're going to keep cutting rates and cutting rates. That's going to be obviously data-dependent. So in any case, we have enough Fedspeakers this week and the market will speak for itself, so to speak.

Quincy Krosby:

And that will be on Friday when we have the information from the PCE report. But there is also quite a bit of data coming out this week. A lot of it has to do with housing. So for example, today, Tuesday, May 28, you have the Case-Shiller home price index and that, you know, shows that prices still remain fairly solid. What we're seeing again and again, whether it is with regards to consumer spending, whether it is regard to homes, is that there are people who do go out and pay in cash. These are the upper income wage earners. And in this country there is a very broad cross section of wage earners and the higher inflation, as we hear from the Fed over and over again and we hear from the credit card companies, is that the lower wage earner is under pressure. But what we've also heard from credit card companies is that the payments, you know, paying back the debt regardless of higher interest rates, is being met by the wage earners above the middle income.

Quincy Krosby:

So this is where it gets important because what we want to hear is what's happening to the middle income wage earners. We know about the lower wage earners, but are middle income wage earners under pressure? And we've heard again and again and again that Americans, those with household incomes of a hundred thousand dollars or more are going to stores that you know, have cheaper food items. We heard that when Walmart reported and everyone asked. Quincy, how did they know all of this? Again, it comes from your credit card. When you use the credit card, they know an awful lot about you. So this week we will hear about consumer confidence. We know that that has turned downward. But one of the positives though that we've seen, and this is from the University of Michigan survey, is that the view of inflation in the future, which as gasoline prices started to really ramp up, that future look at inflation also ramped up.

Quincy Krosby:

That's something that the Fed does not want to see. But in the last report from the University of Michigan, that started to inch downward. And that's good news for the Fed because they are not going to, you know, stand by and allow the consumer, which we are 70% of the U.S. economy, start seeing inflation just, you know, up, up, up and never coming down. So that started to work its way down actually as gasoline prices inched lower across the country. This week also, we have the Fed Beige Book that's coming out tomorrow on Wednesday afternoon. And normally, you know, we don't pay that much attention to it, but when you have a market that is very concerned about where the economy is headed and when you have GDP forecast coming in that are lower then the stellar numbers that we have enjoyed also, which help underpin and fuel consumer spending.

Quincy Krosby:

You know, you want to see the economy cooling but not cold. Let's keep that in mind. Cooling but not cold because if it's cold then the concern is that the economy's moving deeper into looking at a pullback. You know, a recession, even at the margin. And so that's not what the market wants, but just cooling so that inflation doesn't take hold with consumers who are prepared to go, you know, full steam and full throttle in terms of spending. And so when I look at that, the Fed Beige Book is important because of all of the data releases, you know, they all look back, right? That's how we get the data. But the Fed Beige Book is anecdotal. It's anecdotal. And it's actually much more up to date than the data that that we normally get because it's created by the Federal Reserve banks. They try to make it as up to date as possible.

Quincy Krosby:

So we see that increasingly as we try to get a handle on where the country is headed, that we look to that Fed Beige Book and get a consensus of where the regions think wages are moving, where the economy is moving, and what the banks are saying in their respective regions. And also what companies are saying, small and large companies. So that's why it becomes increasingly important and why the market tends to pay more attention to it. We'll also get the first read of revision on GDP. This would be for the first quarter. Expectations are that that is going to inch downward. There's a big debate about this, but nonetheless, we'll see what the number actually is. But remember about the market, the market looks ahead and the market is looking at what the market itself is saying. In terms of, again, the economy. Initial jobless claims have actually been fairly healthy and actually coming in at a healthier level.

Quincy Krosby:

Although the expectations are that this week's Thursday morning, 8:30 Eastern, that initial jobless claims can inch just a tad higher. We are also going to be getting pending home sales. As I mentioned this week is quite a bit about the housing market. The expectations are that pending home sales have actually come down from actually pretty healthy number last month, which was about 3.4%. The expectations are that it will be negative. We're also going to be getting on Friday as we do when we have the PCE, personal consumption expenditures index, we're going to get personal income and personal spending. You typically want them kind of mirroring each other so that you don't have personal income down, but personal spending up. So the expectations are that however, that we will see personal income down just a tad and personal spending up a little bit more than personal income.

Quincy Krosby:

We'll see. What you don't want to see is that they both dropped dramatically. Again, what that would feed is a narrative that the consumer is basically shutting down. We're not seeing that, but it does indicate that the consumer is becoming more discerning and more careful with spending. And then you get to the basic, you know, report that everyone is waiting for this week and expectations are right now that we will either come in on a year over year basis at the same pace where we were, and that's a 2.8%, still above 2%, but that at the core, and this is also crucial, probably more crucial than anything, is that we come in a tide lower. That's what the market wants to see, that it will be cooler and that would be positive for the market because what it would do is put into play a rate cut for this year.

Quincy Krosby:

We are hearing more and more of prominent Wall Street strategists, CEOs suggesting you're not going to see a rate cut this year because inflation is not coming down at a pace that is going to allow the Fed to actually cut rates. So this is where we are. The data will, you know, will come in, will tell us what, at least the data suggests and the market will do its own job. I'm also paying very close attention to Costco. Now remember, Costco will come in on the 30, but it does a quarterly fiscal report as opposed to what we're looking at. Nonetheless, nonetheless, it still matters. You know, the importance of Costco, what are they seeing from their customers? That's what we want to know. We're very focused on the consumer, we're focused on the labor market, we're focused on what consumers think about the ability to get jobs if they are let go.

Quincy Krosby:

And that has, you know, raised questions because people are worried about that and yet the unemployment rate remains attractive. It remains resilient. We want to see how resilient the consumer feels when they go out to stores like Costco, and that's going to be important for the market. So, you know, the earning season is essentially over. Everyone says it's over, but as they say, it isn't over until it's over. And we've given the focus on the consumer, Costco will be important. And by the way, the earning season has been solid. It's been resilient. Earnings expectations continue to rise, obviously at a measured pace. But nonetheless, to rise at an appropriate pace with, you know, especially with the much going on in terms of the election, the campaign, diverse views on where the election is headed, diverse views on taxes. Where are they headed? What's going to happen at the end of the year? And, you know, where we're going to be with the deficit, and how we're going to control the deficit.

Quincy Krosby:

Those issues keep coming up over and over again. But right now this market is focused on what are the companies telling us and what are we seeing in terms of inflation? And even though Nvidia did incredibly well, it was fascinating, was it not, that it was the one stock hold up there in the green while the rest of the market was engulfed in red? What it proved above all else is that a company as strong as Nvidia with tremendous guidance, tremendous earnings, tremendous outlook, that even Nvidia can't beat the Fed, right? That's what, what happened and why? Because we saw in the S&P global flash report that prices paid went up and that's not what the market wants to see. So that's why it puts even more emphasis, by the way, on this Friday's number. So we will look forward to it. We will be back next week. Thank you very much for listening. Bye-Bye.

Quincy Krosby:

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Quincy Krosby:

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