Fed Chair on Capitol Hill and Payroll Report Are in Focus This Week

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 Monday, March 4, and thank you for joining me. This week, again another important week for the market in terms of data. And also I want to point out, I mean the earning season, everyone talks about it being over, but I'm paying attention to Costco. I want to hear what they have to say. I'm also always interested if there's a question about whether or not the folks going to Costco are buying gold. It is important because what it would represent is concern that consumers have over whether inflation is really gone or are they concerned about, you know, geopolitical events. Because we saw gold sales amongst retail buyers in Costco, by the way, very high amount. And by the way, around the world, we're seeing retail buyers of gold.

Quincy Krosby:

Not just jewelry, but actual gold bullion. And why? Because many are concerned about geopolitical risk. They're worried about the economy, their respective economies. We even saw this in China where the Chinese retail buyers were buying gold. So this is all very important. But also we want to hear from Costco what they're saying about what the consumers are actually buying and what they're not buying. And then we'll hear from Target. And I think that's going to be interesting as well for a variety of reasons. But to hear again, another view about the U.S. consumer. In that vein, this week is going to be important because obviously the market and consumers want to see rate cuts. I mean that is, you know, top of mind. And we're going to have two days of Chairman Powell up on Capitol Hill. This is the semi-annual visit that the Fed Chair has on Capitol Hill to discuss, you know, how they see the economy, what they're doing, and then answer questions.

Quincy Krosby:

And that's where it gets really interesting. The statement that the Chairman will read will be the same for the House of Representatives and also for the Senate. But then after that, the questions and answers usually are quite different between the House and the Senate speakers. If you are watching it on TV or in a snippet, you'll see that the House of Representatives, the congressmen and congresswoman become far more vocal about what they want for their particular constituents. It's interesting to see the contrast between the Senate and the House of Representatives. Still what the market is looking for is trying to glean any more information, any more, even nuances as to any kind of change that the Fed may have in terms of rate cuts and perhaps the timetable for rate cuts. So this is going to be important for the market. And again, I'm going to point this out over and over again, the questions and answers.

Quincy Krosby:

That is where you very often can pick up any change in sentiment or tilt of positioning from a Fed Chair when they answer those questions. So that will be this week. And then the other big item this week clearly is the payroll report. Now, everyone asks about this, what about the report that comes out in midweek? And that is the report on private payroll. The ADP report. This is important because it is just private. It doesn't have any input from government hiring. And we want to see how many new jobs are created and any revisions. Actually the ADP report is actually subject to pretty heavy revisions over the last couple of years. But nonetheless, it is about the private sector and then we look at which areas they're hiring. And then, and then I add this, this is important because the market has a tendency to extrapolate from the ADP report and say, oh, well this is what we are going to see with the payroll report from the government on Friday.

Quincy Krosby:

There's not a, how do I say this? A 90% positive correlation between the two as everyone knows. I mean people who do this for a living know that it could however offer a trajectory; sort of the path of private hiring, and that's something that the market will pick up. But sometimes we've seen major divergences between the two employment and payroll reports. Still it is important and we will be paying attention to that. We will also pay attention on Friday, and I want to stress this, is about wages. Keep in mind, the concern has been that wages have been climbing too quickly. Obviously we've had a lot of strikes in the country and especially in the service sector where you need workers to do the jobs. Wages have ticked higher. If those wages come down in this report, it will be important for the Fed. And here's the reason, it isn't just about the wages themselves.

Quincy Krosby:

It is that what we know is historically that if wages climb higher companies, service sector, non-service sector try to pass along those higher wages onto the final buyer. Whether it is the retail buyer, the consumer, or even businesses. And so that is why it's important and because that is where you have inflation when the prices rise and if buyers are willing to pay those higher prices. So if wages come down, the thinking is that you know, they will not be forced to raise prices and that then helps the trajectory, the downward trajectory of inflation. And after all, that is what the market is focused on. And why? Because that's what the Fed is focused on. The Fed has said over and over again, we are going to be careful about when we begin rate cuts because we want to make sure that inflation is moving at a quicker pace towards our 2% target.

Quincy Krosby:

I also want to point out that they have been very clear. We are not going to wait until we reach 2% or to cut rates. We just want to make sure that inflationary pressures have been quelled enough so that we feel confident we're not going to see a spike in inflation. So that's why those wages are very important. Now the consensus estimates by the way, happens to be falling that, yes, wages will come down in this report. So very important. The other thing that I'm paying attention to is the hours worked. Because if we see that hours worked is actually shorter than last month's report, it's going to suggest that the economic activity has slowed. It's obvious if we don't need workers, you know, for a full week, we will cut those hours and but it will then suggest that the economic activity has slowed a bit. And then we're also going to pay attention to what kinds of jobs.

Quincy Krosby:

Just as we are in that private payroll report midweek, we want to see which jobs are being created, which sectors are hiring. And you know, many folks will say, well you know, many jobs were created in the government and they try to make it sound as if it doesn't count. But when we are looking at the overall picture for inflation and consumer spending, which I say every single week, we are responsible for about 68 to 70% of our economy, of our GDP. What we know is that it doesn't matter if you work for the government or the private sector. If you've got wages coming in every single week, every single month, you have money in your pocket to spend. So that argument that well, it's just the government. Not in terms of when we look towards how does it affect inflation. The consumers have jobs. If consumers have money in their pockets, we know that consumers tend to spend. They stop spending when they are worried about the job market.

Quincy Krosby:

Now, that gets me to some of the consumer sentiment reports we saw last week. And there, it's very interesting. Consumer sentiment has actually started to tick down a bit, and one of those areas that was most mentioned by consumers happened to be about jobs. They said, well, you know what? We're more worried about the jobs market. We're more worried about the ability to get a new job. That was interesting because what we also know, to repeat, is when consumers are worried about jobs and the ability to get a job, if you get laid off, they tend to stop spending as much as they they have. And so this is all interrelated. It's kind of like an ecosystem, if you will. Jobs, consumer sentiment, and spending and therefore, inflation. And so, the expectations are that one we are going to see approximately, this is the estimate, between 190,000 to 200,000 new jobs, which is lower than what we had last month obviously because that was a very big surprise, and that we will see wage growth coming down just a bit. And remember, that would be good news, especially in the eyes of the Federal Reserve. They don't want to see the labor market crash. By no means do they want to see that. They just want to see a modest slowdown just so that it would again, slow down spending and therefore, slow down inflation. And then as I said, that companies would not be compelled to try to raise prices in order to be paid back for the higher wages. So it all kind of fits into this puzzle of what the Fed is looking at. And then the other aspect of it is we want to see how many new folks have come into the labor market looking for jobs. The expectations are, by the way, that the unemployment rate will still stay at the 3.7%, which is quite low, by the way, historically.

Quincy Krosby:

So nothing particularly exciting is expected, but as we know, sometimes this market comes and just, the labor report comes and just sort of shocks everyone, either very low or very high. And now the market is just expecting something fairly steady. And so that will come on Friday. But the other news for the market really is about Chairman Powell's visit to Capitol Hill this week. It'll be a two day event, one for the House of Representatives and one for the Senate. And then also we have again, as I mentioned, some earnings reports. I'm paying very close attention to Costco to hear what they have to say about consumers' habits, consumer spending, any changes that they've seen. Similarly with Target, Target typically focuses on a little bit of a higher wage earner than say Walmart. But we want to hear what they have to say about again, consumer spending. What do they think that the consumer is thinking at this point, you know, post-holiday spending. Overall, when we come into March, particularly during an election year, seasonality takes hold as it does in February, but March tends to be dicier for a variety of reasons. We also have the debt situation and it looks as if, as I do this call, there's been a partial solution. Of course, it's the kick the can down the road solution that all of us are getting used to but nonetheless, March tends to be a bit more dicey in terms of seasonality. And it's a market that we all know has done very well. We're looking to see a bit of a, of a consolidation, which is healthy for a market, to sort of digest all the gains. But nonetheless, headlines are important. Oil prices, I also want to mention, have ticked higher as OPEC meeting, OPEC plus meeting, came out and said that they're keeping the voluntary cuts. The voluntary ones, by the way, would be 2 million barrels a day.

Quincy Krosby:

They're keeping that, that was actually in unison, something they did not get the last time they tried to get a cohesive announcement, but they did 2 million barrels a day cut, but also keep the 1 million barrel a day cuts that they have in place longer. So we initially saw West Texas Intermediate Crude, which is the U.S. index, climb up to almost $80 a barrel. It has pulled back just a little bit. Another bit of news for the market this week, which will be important for those of you who follow emerging markets and China, still the second largest economy in the world. They are having their major meeting. This is where they bring in all of the party officials, and they set a goal for the 2024. The expectations are that it will be again, around 5%, but the market is focusing on how do you get to that?

Quincy Krosby:

What are you going to do to get to that 5%? If indeed it is 5%. Is it going to be fiscal stimulus helping? Is it going to be manufacturing? We're seeing more heavy manufacturing, by the way, out of China than we've seen in a long time because that's not where they want to go. But they need money and they are just trying to export as much as they can. But then they also want to have aconsumer-ledd economy and in addition to that, they want to have an economy that is higher end of manufacturing and technology, for example. So all of that, the market is focused on how do you get to your goal? What are you doing to help bolster that goal? Then, one other thing that has come out, this is as I do this call, an announcement came out that the premier in China is not going to hold a press conference.

Quincy Krosby:

Now why is that important? It is important because it breaks all precedent for decades that there has always been a press conference with reporters, foreign reporters, domestic reporters about the conferences. It's a conference that goes on a number of days and it has always been seen as a way where the premier actually becomes, how shall I say, a little bit more open if you hear what reporters have to say about the fact that the premier will not be speaking, will not have a press conference, and then they added this, and we expect this to be what we see next year and the year after that. The question is why, and is it because that typically, the premier becomes a bit more candid? It's not as scripted as the rest of these announcements are from these big, big meetings. So this has been making the news as I do this call and actually very, very early in the morning that he will not be speaking.

Quincy Krosby:

And the question has been, now why? Why now? Why aren't they going to allow this? Is it that they don't want to have that a little bit more candid back and forth with reporters? So it'll be interesting and now there's all the talk of this. So again, China trying to lure back investors, trying to bring the stock market up with their quote unquote stabilization fund, which probably is going in and just actually buying the stocks. So the market is very, very much following this to see what they are thinking, what they are doing. But it will be without having the most important, and that always came every year with a tremendous amount of anticipation when the premier in China was facing the foreign and and somewhat domestic reporters. But again, with a little bit more personality than we're used to and a bit more candid answers that usually do not get, because these meetings very, very scripted.

Quincy Krosby:

So a very busy week for the market. And again, the two big issues will be Chairman Powell up there, whether the market can glean anything that's different from what we've heard about, you know, rate cuts. When are they coming? Are they coming? Is there any scenario in which you will not cut rates? I want to make this clear. There is a narrative coming out in the marketplace of some of the very smart analysts saying they won't need to. They just don't need to cut rates. We will see and see if anyone, by the way, actually asks him, Chairman Powell, about that. That would be a major disappointment, obviously, for the market. So far, and I want to stress this, the Federal Reserve speakers, the monetary doves and the monetary hawks, have all said we expect to see rate cuts coming, just not right away. We want to make sure that inflation is quelled. And so the market has been pricing in perhaps June and July because many have actually come out and said midsummer. So it's going to be an interesting week for the market. But please keep in mind, we are in that March period, which even without an election year, you know, factoring in to seasonality, it can be a dicey month. But markets need to pull back, they need to rest, and maybe that's what we're going to see. Have a very good week. Thank you all so very, very much.

Quincy Krosby:

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Quincy Krosby:

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