A Data-Filled Week, But Inflation Report Key

Quincy Krosby (00:00):

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby.

Quincy Krosby (00:08):

Good morning everyone. This is Quincy Krosby. It is the Talking Point. It's Monday morning, December 18. We're starting off this morning before the market opens with an announcement that Nippon Steel is going to be buying U.S. Steel for just over $14 billion. It always is helpful to have a big deal announcement early in the week because what it suggests, whether it is a Japanese company buying an American company or an American company buying another American company, is that there is value in the market. That's what it always signifies to the market, is that other companies are finding value in other companies and therefore other sectors. Typically, what happens is when one announcement comes, you'll start seeing interest in the other names in that same sector. Similar to, by the way, of what we've seen in the energy sector with energy companies, particularly with hydraulic fracturing, which is really shale producers in the Permian Basin, finding bidders coming in and saying, you know what?

Quincy Krosby (01:19):

We're looking at this because it's an attractive value for us. And so that's how we look at it. It doesn't last forever, needless to say. But again, when you start to see these deals announced, it usually typically could be a precursor to more deals in, again, the wider, broader sector. So, we'll keep our eyes on that, but the market loves that kind of confidence that it gives. Last week was particularly interesting. Obviously, as we had the Federal Reserve meeting. This is important because the market decided that Chairman Powell had declared victory on inflation and that he was poised to agree with rate cuts coming in 2024. That was the market's interpretation. Then the pushback came last week, the end of the week, with the head of the New York Fed coming out, John Williams saying, well, not so fast, but then he was joined with the head of the Atlanta Fed Bostic think not so fast.

Quincy Krosby (02:28):

In fact, Chairman Powell at the press conference after you know, the statement came out last week, said, we're not going to declare victory. And yet the market had kind of announcement, well, the Fed has declared victory. They want the option. I think basically the Fed wants the option to be able to raise rates if needed. Now how do I say this? Last week we had retail sales up. The market had actually consensus estimates said retail sales would be down. So again, the Fed doesn't mean that we're not going see rate cuts in 2024, but the Fed wants the option, the option to be able to, if need be, raise rates if it's needed, or just stay on hold if it's needed. So we'll see how many more Fed speakers come out of the woodwork because it looks like it is an orchestrated Fedspeak, come out and say, well, we don't really see it, and necessarily Williams, the head of the New York Fed, basically, we're not even talking about it.

Quincy Krosby (03:36):

So, again, and I'll tell you what happened right after that, expectations for a rate cut in March, yet March of 2024, started to come back down after he spoke. So we will see what the data suggests this week. It's a heavy data week and, not to mention, we're going to see another very important inflation release, but keep that in mind. Normally, when you have someone come out right after the Fed meeting, you begin to say, well, wait a minute, is this coming from the entire Fed, the FOMC, Federal Open Market Committee, coming out to say, market, hey, market, you misinterpreted what we said or what you thought we said. So we'll keep, we'll keep that in mind this week. Also this week, I want to point out what we will hear from FedEx. This is their fiscal year. Remember, they work on the fiscal year, but we want to hear what they have to say about packages.

Quincy Krosby (04:31):

How much are they seeing? It's important, obviously but also keep in mind too that Amazon is pushing forward with their delivery system as perhaps surpassing the FedEx's and the UPS's. So we want to hear what their answers are to some of the questions that they get from analysts. This week is very much filled with the housing market. Now obviously, the housing market still in, you know, difficulties, but we're seeing a pickup in demand and we're going to see it continue, obviously, as mortgage rates come down. The question is, do folks say, well, maybe I'll wait. Maybe I'll wait a little bit longer. Maybe rates come down a little bit later. We can wait. We'll see, because obviously you can always refinance. And also one of the reasons that new construction is doing better is that the builders are being generous with their mortgages.

Quincy Krosby (05:36):

Remember, they are attached with mortgage companies. They have actually their own mortgage companies and they have been, you know, bringing down some of those rates for the new buyers. But in any event, we'll start off today with home builder confidence. The expectations are member consensus estimates. And what is a consensus estimate is all of the analysts put together. So they come up with, you know, a median, so keep that in mind, is that it'll be a little bit more positive. And then we'll have housing starts, building permits and then existing home sales. However, when we get to Thursday, this is important because we're going to have the final revision for GDP, Gross Domestic Product, for the third quarter. Expectations are that it remains at 5.2%. And speaking of GDP, the Atlanta Fed GDP now, which is widely followed on Wall Street, considered to be very reliable because, by the way, they were the one that came up very close to that third quarter GDP forecast of 5.2%.

Quincy Krosby (06:45):

By the way, actually has upgraded its GDP forecast for this quarter. Remember, it had come down below 2% and now they have upgraded it to above 2%. Now, keep in mind, however, it is fluid. The forecasting takes in every single economic data release, and this week will be extremely important. So by the end of this week and into next week, we will see another upgrade or downgrade of the Atlanta Fed GDP now forecasting. So it's important but important also that the last upgrade was an upgrade. That's my point. We'll also have on Thursday the Philadelphia Manufacturing Survey. Now remember the Empire Fed Survey, which is a smaller one, not widely watched that closely. It's New York and Connecticut and parts of New Jersey, that came down. The expectations are however that the Philadelphia Manufacturing Survey is going to be up a little bit, but when I say up, it is still minus what we're looking for is a bottoming.

Quincy Krosby (07:56):

That's the key. Are we looking for, are we going to see a bottoming in manufacturing? And as always, we look for new orders, we look for employment expectations, and that's going to be extremely important. And why, because the Philadelphia Fed Survey is very much in line with the Midwest, the heart of manufacturing in the country. So we'll keep our eye on that. And then we'll have leading economic indicators. Also here, expectations are that leading indicators will have climbed a little bit higher, still in negative territory, but coming out a little bit. One of the things about the market that's fascinating is we look for news to be less bad. Remember that it doesn't sound very scientific, but we look for the news to be less bad. And then we are going to have on Friday the durable goods orders. And this is important because embedded in durable goods is a component that actually is a figure for capital expenditures, and therefore it's going to be important.

Quincy Krosby (09:04):

Expectations here are, is that we actually move into positive territory. So that's going be important as will be mm-hmm, the PCE, Personal Consumption Expenditures, Index. Remember, this is the Fed's preferred picture of inflation, and the information people always ask, well, tell me what is different between this one and the consumer price index? Well, the reason is that the way this one is composed, it comes from employers, it comes from companies as opposed to individual surveys. That's why the Fed, I think, enjoys it because they get the information directly from companies. And the expectations are that the core personal consumption will come down a bit, which would be very good news for the market, as will super core come down a bit. We'll see. Because the market is sensitive to this right now, watching to see is the path towards 2% inching closer?

Quincy Krosby (10:08):

No one is expecting it this year or even next year for that matter. But is that, is inflation beginning to untangle in what is called the last mile, which is always the most difficult, and that is what the market wants to see. Also this week, we'll have personal income and personal spending. Expectations are that personal income inches higher, as does personal spending. So this is an important week, by the way, for all kinds of data, particularly home sales, everything associated with home sales because even on Friday we'll have new home sales, and then at the end of the week we'll have consumer sentiment. What we want to look at in consumer sentiment is, are we still seeing that the U.S. consumer sees inflation in the future coming down? The report that we had before this one that we'll see on Friday, suggested that that is exactly what is happening.

Quincy Krosby (11:08):

They're seeing inflation in the future one year and then three to five years coming down. That's what the Fed wants to see. They don't want to see inflationary expectations climbing higher. So this week is extremely important for the market, but remember, the market is focused on inflation. Is it coming down and how quickly is it coming down? So we will have to wait until Friday for that information. But before that, a host of data regarding the housing market, and also keep your eye on the Philadelphia Fed Manufacturing survey. If we see that bottoming still a negative territory, but bottoming, that's going to be important, again, to repeat why? Because that has a higher positive correlation with the heartland where manufacturing is located, much more so than the Empire Fed Survey, which really was fairly dismal. In any event, it's going be an important week for the market and we want to see whether or not Santa Claus starts to show its signs. Obviously, I think Santa may have come here a little bit early, but remember, the market is overbought and in an overbought market, you want to see the market kind of slow down, kind of take a pause, take a breather, maybe getting ready for Santa to show up toward next week as we get closer and closer to when statistically Santa Claus is supposed to show up. Have a good week. We will be back next week. Thank you all so very much.