Earnings, Real Estate, and Fedspeak Dominate the Calendar

Quincy Krosby (00:00):

Hello

Quincy Krosby (00:00):

From LPL Financial, welcome to the Talking Point. I'm your host, Quincy Krosby.

Quincy Krosby (00:07):

Good morning. This is Quincy Krosby. It's the Talking Point, and it's Tuesday, January 16. Thank you for joining the call. This week is quite an important week for the market. Shortened week, but a heavy, heavy calendar of economic data releases, earnings reports, and Federal Reserve speakers taking center stage. Not to mention Davos in Switzerland. All I know is that my cars are covered with snow. I don't need to listen and look at Switzerland to have a sense of what's going on here in the United States of America. But that said, I'm only being slightly facetious in the call because, you know, we're hearing from officials from central banks, officials from the International Monetary Fund, from CEOs, and what we're going to have this week is a very important snapshot of the strength of our local economy, regional economy, and also again, what Federal Reserve speakers see in terms of rate cuts.

Quincy Krosby (01:15):

Remember, this is crucial for the market, and it's a market that has surged higher at the end of 2023 to the point, I just want to stress this yet again, the market has become overbought on short-term and median-term levels. However, we're transitioning, the more this market closes down, we're transitioning to being oversold. Keep that in mind because oversold then provides a nice underpinning for a serious bounce, a serious rally. But that said, let me go over, when we look at the data coming out this week, and then we'll go over what we're going to expect from the earnings reports. The data this week, tomorrow is going to have the Reus retail sales. And obviously this is important because there is concern over how much the U.S. consumer can continue to spend. Remember, the labor market remains solid. Is it slowing a bit? Yes. I mean, under the hood, we talked about that last week.

Quincy Krosby (02:21):

There are issues or questions about how much more can we see in terms of strength of the labor market. The labor market obviously fuels consumer spending. The stronger the labor market, the more the U.S. consumer feels confident. And this is incredibly important because we, the consumer, represent nearly 70% of the economy. So overall, this week we'll get retail sales. That will be tomorrow on Wednesday. And we'll also get industrial production, which is going to be extremely important at consensus estimates. And remember what consensus estimates are when we use that term. It is all of the analysts that come in have their reports and they take a consensus of it. That's really what it is. So consensus estimates right now in terms of retail sales actually are up for the month of December. You remember, we always look back and then for industrial production, actually right now, that is down a bit in negative territory.

Quincy Krosby (03:24):

The other thing we're going to have this week, and that will be Wednesday, that's tomorrow, is the Fed Beige Book. And I always get people laughing because The Beige Book sounds so dull, doesn't it? The original color was beige and that sounds so boring. But when you are in a period, such as we are now, trying to decipher whether or not the economy is going to stall, let alone perhaps go into a recession, or is it going to gain momentum? What The Beige Book offers is an up to date more so than the data, by the way, an up to date anecdotal report from the various regions in the country where their Federal Reserve banks on the state of their respective economies. What are their banks telling them? What are the businesses that they have in those regions? What are they saying about the economy? And therefore it is important.

Quincy Krosby (04:21):

The last Beige Book that we had showed a quote unquote modest slowdown across the country. What we want to see now for this Beige Book, again, it's looking back obviously, but is that modest slowdown, has it intensified or do we see an uptick? It's going to be important, even though there are folks who say, why do you pay attention to it? We pay attention to it because truly it is much more up to date than folks understand and more up to date than some of the data releases that we get that are, you know, obviously a month early. And then also Thursday we're going to get the initial jobless claims, and I want to point this out. They have been fairly steady and there's been nothing dramatic in those initial unemployment claims. And that's important because it gives us an up to date picture of the landscape in terms of the labor market.

Quincy Krosby (05:21):

But we also look at continuing claims. Why that's important is that continuing claims give us a glimpse of whether or not people are landing jobs, because obviously if that continues to increase, it tells us that folks are billing more and longer for unemployment. So that's actually I think very important. But right now the consensus is that initial jobless claims will still be quite undramatic, if I put it that way, or modest. We're going to have housing starts as well. And we're also going to have building permits. And we're all looking forward to that because one of the things that we've seen is that as mortgage rates have tipped lower, we're seeing folks come in actually buying houses, getting mortgages. Now remember, many of the large builders are offering much more attractive mortgages than the banks. And this has become important because that has helped the new houses, new construction sales there, because again, with existing home sales, still not recovering dramatically because folks still are not putting their houses on the market.

Quincy Krosby (06:32):

Although we have seen a little bit of an uptick there. I do want to point that out. But the new home sales have been leading, and that's because the builders have been able to offer more attractive rates for their buyers. So we're going to see, you know, how the housing starts. Look this month, by the way, the consensus estimates for December shows a little bit of a downtick there, but building permits right now I'm looking at estimates and that looks like it's ticking up just a bit. Also, pay attention for Thursday to the Philadelphia Fed manufacturing survey. I mentioned this because there is a concern that manufacturing, while obviously it doesn't equate to the service sector in our country, which is much larger than manufacturing, it's still over 10%. And the fact of the matter is it's extremely important for the strength and health of our economy.

Quincy Krosby (07:29):

The Philadelphia Fed manufacturing survey has a closer relationship in terms of the heartland, what the, you know, big manufacturing centers report. So we pay attention to that Philadelphia manufacturing survey, and right now it looks as if perhaps it's bottoming, still in negative territory, but beginning to bottom. I do want to say that the Empire Fed Survey, which came out this morning, it's negative. I just want to point that out. It's negative, but it looks as if it may be bottoming as well and so turning the corner, and remember that's important. Even if something is negative, we look to see is it less bad than the month before, but focus will be on that Philadelphia manufacturing survey, and that's Thursday morning at 8:30. And then Friday we get more in terms of home sales and that will be the existing home sales. Expectations are that that may have inched up just a bit.

Quincy Krosby (08:36):

And the thinking behind all of that in terms of existing home sales is this, if those who sell their homes, perhaps they don't have mortgages, but let's say they believe they can buy something else and they wanted to get out of their existing home, perhaps they are beginning to put those houses on the market. Remember, supply has been extremely tight and this may indicate on the existing home sales that if they believe they can sell their homes and still move and get a more attractive mortgage, if they need another mortgage, perhaps that is the underpinning for existing home sales to climb just a bit. And many of those who are in their homes, they've paid off their mortgages, they've got cash, perhaps they're seeing that where they want to move, that those houses are staying on the market a bit longer and prices are coming down.

Quincy Krosby (09:33):

That's been a trend in the country where those existing houses, they don't sell right away. Those prices are coming down as opposed to everyone grabbing whatever is available in the market. Now, in terms of Federal Reserve speakers, we're going to hear from Christopher Waller today. Pay attention to him. I call him a pragmatic hawk, right? But he sounded a little bit more dovish recently, and that's going to be important because again, to repeat, the market is focused on rate cuts. When are we going to have them, and how many? And this is going to be extremely important. Now, right now in terms of the Fed funds futures market indicating when that market believes we're going to have rate cuts, actually it begins in May not March. March is still, the data this week, by the way, will change all of that. But right now it looks as if the market believes the first rate cut is going to come in May, and that there are questions regarding the March 20 Fed meeting and to whether or not we will see a rate cut there.

Quincy Krosby (10:42):

Right now that is not, you know, firm. It is in the 70% probability, but as I said, the data this week and the Fedspeak this week, I think will affect what the futures market and the probability market forecast for that rate cut. Again, this is important for the overall market. They want more rate cuts and they want it sooner. Also, this week we're going to hear from the New York Fed, John Williams, and he, you know, he speaks his mind and he very often is not necessarily in concert with the rest of the Fed speakers. One thing I found extremely interesting is the comments, and he's going to be speaking yet again on Thursday, is the Atlanta Fed President Bostic. He has been extremely dovish. He is categorized on the Federal Open Market Committee as extremely dovish, but he's been sounding more concerned about cutting rates too early and, you know, wondering and concerned that perhaps inflation starts to pick up as the Fed cuts rates and that the Fed needs to be a bit more careful.

Quincy Krosby (11:53):

We'll hear what he has to say this week. And then at the end of the week, we will hear from Mary Daly, who's head of the San Francisco Fed, and she has been placed in the dovish category. That is to say, you know, we need more help from the Fed and so on and so forth. She can move actually between dovish and hawkish. She seems to be fairly pragmatic based on the data, so we'll hear what she has to say. Now, in terms of the earnings, they have come in mixed. That said, we're in the early stages of the earning season. Estimates have come down a bit as opposed to climbing higher but that's good news and the reason it's good news, it allows for companies to beat those lower estimates. In essence, the bar has been brought down, but remember what we're looking for. We're looking to see if the fourth quarter earnings takes us out of the earnings recession and then brings us into a stronger environment for earnings for this year, 2024.

Quincy Krosby (12:55):

That's what's important for the market. And the other aspect to this is that the guidance is crucial. And one of the things and concerns, and we have to be upfront about this, is whether or not companies have as much pricing power as they have for the last couple of years. If that pricing power diminishes or decelerates, obviously that is an issue for the companies. Now we know that in the consumer staple slash discretionary because it's hard to know whether it's a staple or whether or not it's discretionary. Well, you know, we'll hear from Coca-Cola, we'll hear from PepsiCo because they have been quite successful in raising prices. But the question is, can they continue? But that's, you know, again, not exactly the same as, you know, buying an automobile, a vehicle, in terms of whether or not they can raise the prices. So it's going to be an important theme for the market as to whether companies can continue to raise the prices.

Quincy Krosby (13:58):

We're going to hear from that. And then we also want to hear whether or not companies are going to talk about share buybacks. Yes, this is important and it does help companies. And for those who don't know what a share buyback is, companies go in when their share prices usually are lower, they announce that they will have a share buyback program. It doesn't mean that they always follow through with buying back those shares, but it does help the share price. You could look that up or give a call because it is important. We've noticed a slowdown in share buyback announcements as those share prices became more and more expensive. But now as the market pulls back, perhaps we will hear more during this earning season. And it is important for the overall tone of the market. This week we are going to focus on the regional banks.

Quincy Krosby (14:52):

Yes, we've heard from Morgan Stanley, we've heard from Goldman Sachs already as I do this call. And yeah, they are important whether the wealth management has helped push up revenue growth or mergers and acquisitions helping, but what we're looking for is what are the regional banks telling us because we are a country made up of distinctive regions and they all have a separate underpinning of economic growth. That's what we're looking for from the regional banks. By the time we finish this week, we have heard from banks across the country, and what we want to hear is how is commercial real estate holding up? Because the real estate has been very much focused in specific regions and the loans have come from the regional banks. And this is something that, as you know, has plagued, plagued the market last spring as the one concerns over the health of the commercial real estate.

Quincy Krosby (15:52):

So this is going to be something the market's going to pay very close attention to, but also we'll hear about business conditions, the business loans. Are they being repaid in a timely manner? And also the health of the consumer. So as we finish this week, I've actually joked with people, you know, Davos is great, that's wonderful. We hear all of these top level officials telling us about the global economy. But when you're trying to assess, here at home, whether or not this economy is going to slow down even more than the 2.2% that we are focused on right now is going to change as the data comes in for the fourth quarter of 2023, or are we going to accelerate a bit? I'm going to listen to the regional banks in the United States of America sharing and offering how their particular regions are faring. That's going to give us a very important glimpse of the strength and economic conditions of the United States.

Quincy Krosby (16:58):

So it's going to be an important week as far as that's concerned, and we'll be paying very close attention. By the way, for most of the United States, it's been cold, a lot of snow that's going to be difficult in terms of the airlines and they've got problems, as everyone who's been flying knows. Swapping out those Boeing planes for Airbus and they're looking at a lot of cancellations as well as the snow basically, and the ice takes hold. So everyone stay safe. Thank you so much and please don't hesitate to get in touch. Have a very good week. Thanks so much. Bye.

Quincy Krosby (17:33):

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Quincy Krosby (18:32):

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