Follow FedSpeak for Clues on Rates

Quincy Krosby (00:00):

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It is Tuesday morning, February 20, and this market, as I do this call, it's in the red. The futures are in the red. But as we know, the market has a way of making up its mind during the course of the day. Now, what could be a catalyst as we go into the market today? Well, obviously one of the biggest concerns right now for a market that remember surge higher on the fact that the market believed that we were going to have a series of rate cuts throughout 2024, perhaps beginning as early as, yes, March 20. Now, what's happened is, and we all know this from last week, some of the inflation reports that came out indicate that inflation in what we call that last mile; the last mile is always difficult as some of the inflation stays stickier and more stubborn.

Quincy Krosby (01:05):

However, and this is important, when we look at the manufacturing reports, one of the things that we saw out of the Philadelphia Fed Survey for manufacturing, which by the way, has implications for the rest of the country as opposed to the New York, which is called the Empire Fed Manufacturing Survey, which is much more localized; New York, Connecticut, New Jersey. The Philadelphia Fed Survey; many of the economists see it as a bellwether for the rest of the country. Now, what did we see in those two reports? We saw that the prices paid and the prices received climbed higher. And that's something that you don't want to see. Certainly no central bank, it doesn't matter which central bank it is, wants to see that happen. So again, that was a difficulty. And then, last but not least, the market had basically hoped upon hope that following the CPI report that we got, that the Producer Price Index, the PPI, would in essence refute the notion that prices have inched higher or some have termed it accelerated rather than decreased.

Quincy Krosby (02:16):

And what happened? The Producer Price Index was in conjunction with this notion that prices are climbing higher. Now, is this a one-off? It could be. It could be just a particular period that we were looking at. And that's why the Fed has been more cautious about coming out and saying, essentially leading the market towards a definitive time for a rate cut. So right now the market is saying, well, you know what? We may not have a rate cut on March 20, maybe not even in June, right? And this is, and now you're going to see headlines. I'm just saying it outright. Well, maybe the Fed is going to have to raise rates. Well, the Fed is going to be very careful. They are being deliberate and they are delivering their messages almost in unison, which tells you that this is something that the Fed is meeting, they're talking about it, and how to telegraph to the market what their thinking is.

Quincy Krosby (03:10):

Now this week, this shortened week will have quite a bit of Fedspeak, but we will also have the minutes coming out from the last Fed meeting, which is interesting. And the market is always hopeful that something new comes out in the Fed Minutes. They can glean something that the market doesn't already know, and we'll see if that happens. However, we have had an enormous amount of Fedspeak and this week is no exception. But I want to point something out. On Thursday at 10 o'clock, the vice chair of the Fed, Philip Jefferson, is going to speak. Now why am I signaling his comments as opposed to the other speakers? Because typically the vice chair speaks in concert with the chair, and that's important. They typically do not go rogue. They don't start, you know, coming up with their own ideas. If they differ from the Fed chair, they typically work very closely with the Fed chair, that would be Jerome Powell, before they go out and deliver comments that are certainly going to be picked up by the market and the press actually globally. So keep that in mind. So this week, a full, full raft of, of speakers, but I am keeping my eye on vice chair Philip Jefferson. And also, keep in mind, if you're following this at all, that Jefferson comes from the more dovish part of the spectrum. You know, he was Fed governor and then appointed as vice chair by the administration. So when he speaks it, sometimes he'll sound more hawkish. But again, to repeat, it's typically in conjunction with the Fed chair, not to mention the entire FOMC, that's the Federal Open Market Committee. That's the committee that we all follow on Fed Day. So we'll keep that in mind. And also this week we have a series of important, actually important economic data releases.

Quincy Krosby (05:04):

Later this morning we will have the U.S. leading economic indicators. Now, this has been going down, down, down for months, months and months. We are going to see if it's bottoming. So it can still be negative, but if it is less negative than the last read, the market will see that leading economic indicators are actually turning the corner and bottoming. So we'll pay attention to that. But again, on Wednesday, those are the minutes. The other thing we're going to pay attention to obviously is the initial jobless claims. The expectations are that they pick up a bit, but not to the point of being unhealthy. Why do we watch initial jobless claims? Because they give us a very early reading, an early sign, of any deeper problems in the labor market. Obviously when folks get laid off, you know, they go and apply for initial jobless claims unless they leave a job where they're getting severance and they then wind up getting a new job.

Quincy Krosby (06:04):

So we pay attention to it. It tends to be, again, an early sign of any problems within the labor market. And so coming out on Thursday, the number is expected to pick up. The consensus estimate, by the way, is about 216,000 new claims. But certainly that is not within the category that we would label a danger sign. Also this week we will have existing home sales which obviously is important for the market. And we will also have, and keep this in mind, you know, when we look at the purchasing manager indexes, where we get manufacturing information and the service sector, which is the largest part of the economy, we have two different companies in essence telling us what we follow. So not to get confused on this, we will have the S&P has its own consultancy for this. They're going to come out with Flash reports on Thursday.

Quincy Krosby (07:00):

It will be Flash Reports are quick. It's not the final report but it gives us a hint of what they're seeing. So this will be the S&P Flash U.S. services and S&P Flash Manufacturing. And keep in mind, just like the Institute for Supply Management, ISM, which is very important as a guide for the markets overall, 50 is the line in the sand; above 50 tells us there's expansion, below 50 contraction. And in this environment where the market is searching for clues about the economy and so is the Fed, by the way, these reports become more and more significant. So we're going to keep our eye on that. Overall, I want to talk about the earning season. I know we heard from Walmart today. Walmart is very important, right? They are the largest of the employers. They are large in terms of what they see from their own customers.

Quincy Krosby (07:58):

And remember, we also pay attention to see whether or not they are seeing more spending online sales were great. That's what they told us. And they also said that consumers seem to be a bit more careful now not going out and splurging, but nonetheless, they beat on the top line and the bottom line. One thing that I follow from Walmart, it has to do with their call. And what we have heard over and over again was, well, we're worried about consumer spending. I don't know if folks follow that, and it had an impact on the market because when they speak, they're speaking for the average American and also higher-income Americans. They know this from the credit card information, who went in to their stores because they needed to save money and obviously the food shopping and so on. And they wanted to see if those with incomes above a hundred thousand dollars more than were going into the Walmart stores.

Quincy Krosby (08:53):

But they wanted to see if they went into the aisles to buy higher margin items. So again, you get a very interesting picture of the U.S. consumer from Walmart, but what we heard in this call was not a major concern about the consumer. As we heard for a number of their calls, in terms of the guidance that they offer during the earning season, past this time around, it was, well, consumers are not buying as much, but they're coming in. Foot traffic is there. It wasn't as dire as we have heard in the past from them. So we're going to keep our eye on that. And we also heard from Home Depot that again, consumers are coming in, they expect to see a pick-up, but there's been a slow down in, you know, home renovations, but they added this extra comment that they expect to see a pick-up.

Quincy Krosby (09:42):

Well, certainly their seasonality with that isn't there. We've seen a lot of rain, we've seen snow, we've seen ice. And so their expectations are that they expect to see a pick-up. Very important for us to focus on the consumer. Why? Keep in mind, we are about 68, 69% of GDP and that's why it's so important. In terms of overall earnings, we're almost finished with the earnings season this week. Very important. And this is coming up; it is February 21, that would be tomorrow, and we are going to hear from Nvidia. This is important, you know, Nvidia, you've seen it over and over again. They are the ones that actually produce the processes that get all of that information very quickly. And they are the darling of the semiconductors. Why it's important, because the market is looking for any sign of whether or not they're seeing a slowdown and how much more do they see in terms of their sales to other companies.

Quincy Krosby (10:43):

And this is going to be important. And I want to remind everyone that the last report that we heard from them was actually very good, but the market was disappointed. When you have valuations this high, the market is demanding, the market is discerning, and the market will punish it, will punish it. Say, well, you know, your valuations are high. The cost for buying one of your shares is a lot. You better produce. So this is why the market right now is taking a deep breath because we've seen Nvidia punished before. But nonetheless, it is the market, quote unquote darling at this point. But you're seeing you know, perhaps profit taking beforehand. People are nervous, absolutely nervous. It's going to be important. And it is. And in many ways the event, earnings event this week, just as Walmart was, it's almost the tale of two markets, right?

Quincy Krosby (11:36):

Walmart about the consumer and Nvidia about the state of the Artificial Intelligence that is, you know, being headlined day after day. But overall, 76% of the S&P 500 has actually come into the market and 75% of that 76% that has been reported has beaten earnings expectations. And 65% have beaten in terms of revenue. This is good news because we were concerned at the beginning of this earning season, which is the Q4 earning season, remember we're looking back, that perhaps it was dipping down. It actually started to pick up and the guidance has actually started to pick up. We still have a way to go towards the end of the earning season, but this week and next week we get more into the retailers and we will hear what they have to say. And it is important because the consumer is extremely important in our country.

Quincy Krosby (12:32):

And it's not all about, you know, just the semiconductors and semiconductors. Also, let me add, I'm watching very closely, the small cap names, because we want to see them perform. I've said over and over again, when they perform and remember, small caps come in different sectors; they are the small banks, they are small tech, they are small biotech, small industrials. We want to see how they perform because they are at the core, so to speak, of the regions in our country. They are very much ingrained with the basic economy, the economic conditions. When we see them perform, which we have, and we want to continue to see it and see follow through. And what it tells us is that that group actually sees one value in their prices, but also they see economic conditions holding steady because they are very close, again, to the very core of our economy.

Quincy Krosby (13:37):

And they will sell off in a heartbeat if they see the economic conditions starting to falter. So I pay very close attention to them. Overall, this market is, yes, it's expensive, it's 20.4 times forward earnings. We always look at forward earnings. And that is above the five year average of 19 times forward earnings or the 10-year average of 17.7 times forward earnings. The reason I think that this is important is, again, when you have valuations, this high companies need to perform or outperform. The market is not going to put up with any movement downward in terms of performance. You could see that the market will sell off and try to find an equilibrium between earnings guidance, bottom line, top line, and that valuation. But this week too, we are focused on, please keep this in mind, all of the data and what the Fedspeakers are going to tell us because the market is still hoping upon hope that we get rate cuts earlier than the market is now suggesting.

Quincy Krosby (14:43):

And I want to end with this. The hope is that we get rate cuts that are based on an economy that is still doing well and that the Fed just feels like, you know what? These higher rates should not be in effect with an economy that's doing well, but not feeding inflation. That's the key. The Fed could also lower rates if the economy falters. If the labor market starts to really falter, the Fed will come in and they will lower rates and the Fed will lower rates. If something breaks out there in the economy, in the financial infrastructure, the Fed will come in to provide liquidity. The hope is that a rate cut comes along with an economy that is still growing, but it doesn't have to be growing at 5% or 4%. 2% would be what the Fed actually would probably prefer because the hope is that inflation pulls back as well. We'll hear more from the Fed speakers, pay very close attention to what they have to say because the market certainly will. Have a good week. We'll be back next week. Thank you.

Quincy Krosby (15:45):

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Quincy Krosby (16:44):

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