Fed Meeting Key for Market Direction

Quincy Krosby:

Hello from LPL Financial. Welcome to The Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby and this is The Talking Point. It is Monday morning, March 18, and a very busy week for the market. The market is not just dealing with a host of housing-related data releases this week, which are important in and of themselves, but you also have this week a Fed meeting that is increasingly important for the market, even though the market does not expect the Fed to suggest a rate cut at this meeting. And I just want to say here as an asterisk, if you go back about four months, five months ago, this meeting this week, the market had actually thought we could have a rate cut at this meeting. And of course, now it is negligible. That's even possible. In fact, the market is focused on what the Fed has to say about future rate cuts.

Quincy Krosby:

They have telegraphed over and over again that they are going to be careful. They are going to proceed carefully because what they don't want to do is to make a mistake and cut rates only to see inflation remain sticky or climb higher and then be forced to come in and actually raise rates. That would be a major policy error. But nonetheless, the market has absorbed the fact that they're not going to have a series of rate cuts. But they want to have a sense of when and if, at this point, even if there will be rate cuts, because there are many narratives now underpinning the Fed's moves. And one of those is from a number of analysts, but maybe the Fed doesn't even cut rates at all this year because inflation will not allow them to do it. We want to hear from the Fed also.

Quincy Krosby:

This is a dot plot meeting and you know what the dot plot is. Many folks, including Chairman Powell, has said, you know, it really doesn't matter, but guess what? It does matter when you have a market that is intent on trying to discern whether or not the Fed is serious about easing rates. Now we're going to hear from that dot plot, and I want to go back if you will, to a dot plot, the last one we had where a couple of Fed members, FOMC, Federal Open Market Committee members actually put in a couple of rate cuts and that got the market all excited. We need to see what happens now or if Powell at his press conference is going to be ever more cautious about what he says and truly sticks to the script. Because remember when he was up on Capitol Hill just a couple of weeks ago and when he was speaking in front of the Senate and answering questions, he actually made the comment, we are closer to a rate cut than we were earlier. That got the market's attention and the market wants to see is he still going to express the possibility of a rate cut this year?

Quincy Krosby:

And are we closer to a rate cut than farther away from a rate cut? So when we look at this, data will matter. And what we're seeing right now is the market still looking at June or July, but we'll see after this Fed meeting whether or not the Fed believes they have to wait a bit longer for it. The other aspect for the market this week is a big conference taking place today. Yesterday they had the pre-opening when the booths go up and you could go in and speak with all of the AI developers. And yes, that is NVIDIA's big conference. And it's interesting because this conference has been ongoing for many years. Only now is it seen as you must be there. You must be part of the AI phenomenon and everyone is paying very close attention to today, that is Monday at four o'clock eastern, when the CEO of Nvidia is going to speak.

Quincy Krosby:

And it's important because the market is looking at whether or not he discusses even today or during the week innovation for their graphics. That's one. And also what they plan on doing with a chip to China, whether or not they've got one that actually meets the compliance expectations from the U.S. Department of Commerce. Remember that was an issue for NVIDIA and they want to continue the relationship, but again, in conjunction with the export controls from the U.S. government via the U.S. Department of Conference. In addition to that, they will talk about AI sovereign and that has to do with their work with other countries, companies and other countries and how they're going to navigate that. Because again, as an American company with important rules and regulations that are becoming clearer from the U.S. Department of Commerce, they have to work in conjunction with those compliance needs and how that will affect their sales.

Quincy Krosby:

And that's just essentially what we're talking about. There are sales to other companies in other countries. So that apparently is on the agenda. But this conference is going to be watched very, very carefully by the technology community, the AI community. And again, it is dubbed the major AI Developers Conference. It is out in San Jose, California, and it's an extremely important conference, particularly as the narrative in technology has been underpinned by AI. And obviously, NVIDIA is important. Now regarding whether or not the Fed helps the market or doesn't help the market, we're paying attention to yields obviously for the market. There is what I would call, and I dubbed a yield line in the sand of how much more can the market claim higher if yields climb higher? And there are those who believe it's 4.3% on the 10-year Treasury yield or 4.32, but the market will decide how much it can withstand.

Quincy Krosby:

But, and this is the key, if the Fed makes it clear that maybe there won't be as many even as two rate cuts this year, or if Chairman Powell walks back his comment from the Senate when he spoke up on Capitol Hill, we'll see how well the market can absorb that. It's going to probably be very difficult. The market needs to recalibrate, it needs to pull back, digest the gains. Strong markets such as this market can be over-bought for a long time just as markets can be oversold for a long time. But what we're paying attention to, again, is out in San Jose, California at the San Jose Convention Center, the big AI Developers Conference, NVIDIA conference, and we're going to pay attention to what Chairman Powell has to say and what the dot plot says. But in addition to that, I want to mention one other central bank that will be important is the Bank of Japan.

Quincy Krosby:

Many of you know that Japan has been in deflationary spiral for decades, and they have been looking for inflation and hoping for inflation to stick. They had been waiting for the wage negotiations and that is just completed. And it looks as if wages are higher than expectations. And by the way, that's good news for Japan because it means that inflationary expectations can take hold and stabilize and not just disappear and dissipate. They don't want to go back into a deflationary cycle. So market is expecting either at this meeting this week for the Bank of Japan or in April that they are going to announce a rate hike, not a cut, but a rate hike. This would be the first one since early in the 2000, I think it was maybe 2007. But nonetheless, it's going to be crucial. It will be crucial also because Japan has become an important destination for global investors.

Quincy Krosby:

In fact, if you look at the markets climb, that is primarily due to global investors going in on the back of a belief that Japanese corporations are finally, after so many decades, adhering to the notion of shareholder value, corporate governance. And we know that the government is also involved in trying to keep it intact. In other words, not just a slogan, but have the companies actually understand how important it is. And we've seen a migration from investing in China, by the way, over into Japan. This is not emerging market related, but basically regionally related. So it's going to be important to what they have to say in terms of yield curve control. They will probably dismantle it at some point. By the way, this is where they were able to keep bond yields down and keep them down as much as just a little bit within a range of 1%.

Quincy Krosby:

This is all also probably going to be discussed, but we don't know if it'll be at this meeting or the next meeting. But ultimately they will dismantle it, as long as they feel secure that inflation, the healthy inflation, is finally embedded in the economy. So we're going to pay attention to that. And let's keep in mind something Japan has. Investors have approximately $4 trillion worth of income coming from fixed income around the world. And a lot of it is in U.S. Treasuries. And the market is always concerned that perhaps at some point when those yields rise in the Japanese bonds, that perhaps there's a bit of a repatriation out of the U.S. and into the Japanese bonds. Remember, Japan is the largest foreign holder, foreign holder of U.S. Treasuries. Most likely it will take time for those yields to rise to the point that it's attractive for Japanese investors because they get that yield.

Quincy Krosby:

But nonetheless, it's something that is clearly in the headlines and we will see if it's this week or at the next meeting in April of what they have to say about yield curve control and also the rate height trajectory that they have in mind. But nonetheless, again, for most people in the market, it is about the Fed, the Fed, the Fed. And so in addition to that, I want to also call your attention to the Philadelphia Fed Manufacturing survey that comes out on Thursday. This is important because manufacturing had been bottoming and then we saw the numbers coming out of the Empire Fed Survey, which is the manufacturing survey for primarily New York and New Jersey and Connecticut, and that was down dramatically. And we want to see if the Philadelphia Fed Manufacturing survey similarly looks as if it's off course in bottoming, in fact that it's going deeper.

Quincy Krosby:

The consensus estimates, by the way, is that it goes into negative territory. And why is Philadelphia important? Because it has a very, oh shall I say, positive correlation with the Midwest sort of the manufacturing focus for manufacturing in the U.S. much more so than the Empire Fed. So we're going to keep our eye on that. We thought the market thought that manufacturing was bottoming. If the Philadelphia Fed Manufacturing Index also goes into negative territory, it will not be positive at all for the market, you know, for the manufacturing market. But also keep in mind, and this is key for us today, that we saw prices moving higher when we had the CPL last week. We also had the producer price index last week, which is at a wholesale level, those numbers climbed higher. And that's important because what you don't want is economic growth slowing in the U.S. while pricing is moving higher.

Quincy Krosby:

That is not an attractive combination. And if it continues, what you'll see is if economic growth slows in the U.S. and right now the Atlanta Fed GDP now has this first quarter GDP set at 2.3%, which is still solid by the way, but it certainly has been inching lower. You don't want the market thinking stagflation is setting in. So again, this is an important week for the market. Last but not least is that when we look at these numbers, we're trying to come up with a sense of not just where we are, but where we're headed. And so when we look at the Philadelphia Manufacturing Survey, we're going to look at hiring expectations. We're going to look at new orders because those tell you a picture of demand. And also about the payroll landscape. Again, in the manufacturing sector. We're also again going to have a series of housing-related numbers.

Quincy Krosby:

Home builder confidence housing starts, building permits, and we also are going to have existing home sales. All of this is important, especially if the market believes that the Fed is going to cut rates. That's key for the home builders. It's key for sales because it obviously affects mortgage rates and this is why the market is so sensitive about it. But also, keep in mind, these numbers are looking backwards, not forwards. These are the February numbers that we'll be looking at. Following the Fed meeting, there will be a series of speakers, again, out speaking about probably what the Fed announced, but the market is, you know, actually poised to take in all of this information. And I just want to add here that if the market is disappointed by what it hears from the Fed or even disappointed from what they hear out at the San Jose conference for NVIDIA, the market has needed to pull back for more than just two trading sessions and just bring down that valuation.

Quincy Krosby:

A valuation that is over 20 times the next 12 months. That's not comfortable because markets need valuations that are commensurate with what the Fed is doing, what's commensurate with what companies are doing. And in closing, what will happen is if we don't have satisfaction from the Fed for the market satisfaction and saying, okay, maybe rate hikes summer or along those lines, the market's going to have to wait for earnings because something is going to have to take the place of the rate cuts that the market wants to see. So a lot for this market to absorb. It's a market that is focused in a number of directions, but overall it will be what the Fed tells us about rate cuts, if they're coming, when they're coming, and how many. That's what the market is going to try to decipher. Have a good week. We'll be back next week. Thank you.

Speaker 2:

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Speaker 2:

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