Fedspeak Dominates as Yields Trend Higher

Quincy Krosby:

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

Quincy Krosby:

Good morning everyone. This is Quincy Krosby. It is the Talking Point, and this is Monday morning. It is February 5. Thank you for joining me. The market this morning is focused on, oh my goodness, you know, when are we going to get a rate cut? Now what's interesting about this is that the ISM, Institute for Supply Management, service sector report came out just as I'm reporting this call and there was much optimism. In fact, the headline number moved just a tad above 53, which is expansion. Remember, the line in the sand is 50; above 50 is expansion. And this is actually an important move higher for the ISM service sector. But embedded in that is commentary from business owners saying, yeah, we're pretty optimistic that, you know, we're going to have rate cuts. Well, not so fast. This is important because the market overall has been talking about rate cuts, rate cuts, rate cuts.

Quincy Krosby:

And in fact, the market is looking at March 20 as the initiation of a rate cut cycle. That's 44 days from now. Now keep in mind, chairman Powell was very clear at the press conference, following the Fed meeting last week and just basically saying, you know, it is not likely that we are going to have a rate cut in March. He was actually coming out and maybe because he used the word "not likely," then the market thought, well, maybe he means maybe, maybe, maybe, you know, whatever. Surely there are scenarios in which we could have a rate cut in March, but I don't think they're ones that will be particularly positive. One would be that the economic data releases suddenly change course and become much, much weaker by the time we get to the March 20 meeting. And I can assure you that if it really got bad, the Fed doesn't need to wait for a meeting to cut rates. They would do it right away, especially if the market froze and broke.

Quincy Krosby:

That means that liquidity has dried up. And I always say for those listening, that when I look at and think about periods which I've worked where liquidity has dried up, it's oxygen. You know, we need oxygen. The market needs liquidity. That's the market's oxygen. The Fed could come in in between meetings to do that. But that's one scenario. The second scenario is, and which is more or less the narrative that the Fed is operating on, is that, look, we have a solid economy and in terms of the labor market, remember the Fed more and more is talking about the labor market. Why? Because they are, it's a dual mandate central bank. One is just about inflation and reaching its target of 2%, and the other is to have a backdrop for the labor market remaining healthy. So he was talking about that, you know, last night, on Sunday night.

Quincy Krosby:

And he basically was asked, by the way, and this is very important, he said to a question, he said, look, we are not waiting to cut rates until we hit 2% of our target. That's where you reach what they call price stability. No, he did not say that. He said, we want to make sure inflation is coming down towards 2%. And the reason for all of this folks is that the Fed doesn't want to make a mistake. They don't want to cut rates only to find out that inflation is creeping ever higher and that they may be forced to come in and raise rates again. That would be a policy error. But more than that, you know, businesses, individuals would be making assumptions on, you know, rate cuts coming and continuing to come if they cut rates early. And, you know, then would be furious finding out that rates only were going to move higher.

Quincy Krosby:

It changes the psychology. And obviously psychology is an important part of inflation and deflation. Just to go over this again, in a heavily inflationary environment, we always say buy it today because it's only going to be more expensive in the future. In a deflationary environment, oh, hold off, it's going to get cheaper and cheaper. Let's remember that there is a psychological component in terms of retail spending and business spending. Now also, I want to point out that this week we still have a lot of companies coming to the market with their earnings reports. And a lot of them are smaller companies, and this is, I think, extremely important. One of the things we're looking at the market and the criticism in the market is well, it's such a narrow leadership. The Magnificent Seven has kind of been reduced to what? The Magnificent Four or Five now?

Quincy Krosby:

And that if they're leading the market higher, it's not healthy. You need to have an underpinning in the market of other sectors, other companies, leading the market higher and also those small- and mid-cap names. The small- and mid-cap names, when they do well, it is predicated on a belief, a belief that the economic backdrop is positive. And so we're going to watch to see if this week that, that Russell 2000 can participate if we get a rally. Now, keep in mind also the market is overbought and we always say in an overbought market, you are going to have to just consolidate those gains, pull back a little bit. Nothing to be afraid of, but just allow the market to digest the gains. And of course the catalyst is, yeah, it is the Fed saying, hey, don't think we're going to cut rates when you want us to.

Quincy Krosby:

Let's listen to the army of Federal Reserve speakers that are out today, every single day this week. And remember that before the Fed actually met, the same group, these are the doves on the Federal Reserve, the Federal Open Market Committee, that's the rate setting committee, with the hawks and the doves with exactly the same message to the market. Hey, we're not raising rates until we're sure. And that may not be until the second quarter. And some even said maybe even the third quarter. It was orchestrated. It was a message, like, don't push us because we're not going to do it until we are certain that we are getting closer and closer to our 2% goal. Now, we're going to hear one Federal Reserve speaker after another. Let's see if any of them deviate. Let's see if any of them feel compelled to say no, no, no, I don't agree with chairman Powell.

Quincy Krosby:

I doubt it, but they won't do it that way. But they, some of them do go rogue. But if it's a unified orchestrated message, that's what we're going to hear. And I suggest it's going to be exactly what Fed Chair Powell had to say last night. So in any event, this is what's so interesting, just, I would say two weeks ago, the expectations for March 20 rate hike, the probability was still over 60%. By the way, now it's down to about 17% probability that we'll get one. And here's the interesting thing. May 1, that had been way up there in terms of probability, now it's down to 67% probability. Now needless to say, this is going to change between now and then. It's going to go up and down based on the data. Now keep in mind, the Fed is data dependent, but so is the market. Also, I want to add here, other things happening this week just in terms of the economy.

Quincy Krosby:

Oh, we're going to have the consumer credit report, and that is always interesting and important. So that's going to come out on Wednesday. But in addition to that, we are going to hear from the CBO, that is the Congressional Budget Office. And that's always an interesting headline because they're going to tell us about the budget and, you know, how we're doing with that. And also about the economy, their economic outlook. Chairman Powell made it very clear, by the way, in terms of the deficit. He basically said, it's got to be fixed. That this is no way to keep going. I mean, he was very clear about that. And he could be clear because that's not the Fed's job, by the way. So also what we're going to focus on toward the end of the week, as we always do on the initial unemployment claims, and actually they were, how do we say, fairly healthy last week, but in the report, I don't want to get into that payroll report. You all know what happened. But two things I want to mention is that the job growth was across the board. It wasn't just government jobs. It wasn't just government and healthcare jobs. When you hear folks talking about that, that way, it's almost as if they're not being paid and spending money. But it was broad based. You had businesses hiring. You had every single part of the economy hiring. And there was one thing, however, in that report that I thought was actually worrisome. The number of hours worked was down and that, you know, a strong economy has the hours worked a full week of work. So we'll keep our eye on that looking ahead. And the other part of the story is that there are those who do not think that those numbers because the government relies on surveys, whereas the ADP report, the private sector report that comes out on Wednesdays, showed a downtick in new hiring.

Quincy Krosby:

And many people look at that report, the ADP report, as based on data. It's not based on surveys. It's based on what businesses are actually doing. So there is a view that somehow there's a disconnect between that really astounding number that came out on Friday versus what the ADP report had to say. Obviously all of this becomes resolved over time because we get more and more information. So let's keep our eye on that. And again, one of the things that we're looking at this week, because we have some smaller companies, I'll tell you one other thing before we hang up that I'm going to watch in particular, I'm going to look for PepsiCo that's coming out at the end of the week. Why am I paying attention? Because they have been very successful in raising their prices for their snack foods and for obviously their soft drinks.

Quincy Krosby:

Coca-Cola as well. I want to see if they're continuing to do that. That'll be very interesting. Now granted, they're smaller but, you know, you want to see whether or not these higher costs are being pushed out into the actual prices. Because at some point people say, well, you know what, I'll go get an off-brand. It may not taste exactly like Coca-Cola or Pepsi-Cola, but I don't want to pay those higher prices. We'll see if even they are charging more. It's going to be important. In any case, have a very good week. Pay attention to the message sent by all of the Fed speakers because as we know when it's in unison, it is by design. And let's see if any of the Fed speakers actually go rogue. Have a very good. We'll be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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