Focus on CPI and Fed Meeting Messaging

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 is the Talking Point. It's Monday morning, June 10. The market looks like it's going to have a soft opening, but of course, during the course of the day, not to mention the course of the week, there are headlines, there are data releases, and so on that will change the mood of the market. But I want to go back to last week, if I may, just for a minute. Last week, we had a very important release from the ISM, Institute for Supply Management Purchasing Managers' Index. These are very important releases. We have one from the manufacturing side of the economy, but we all know that the service sector is the largest component for the U.S. economy. And what we saw was actually not expected. We thought that it was going to actually indicate that the expansion in the service sector was intact.

Quincy Krosby:

Remember, the line in the sand is 50, but this moved higher than just 50 or 51. But more than that, more than that, it showed that expectations for hiring was picking up a little bit. But here we go. The prices paid component came down. This is important. When they show that the prices paid component in manufacturing, which did not pull back by the way, but in the service sector began to pull back, it's important because what we want to see and what the Fed wants to see is that overall, prices paid beginning to come down, that will filter in to the CPI Consumer Price Index and the PCE. And what is that? The Personal Consumption Expenditure Index, the PCE, which is the Fed's preferred measure of inflation. One of the things that's really important here is what pushed the prices up. Well, we know because we all pay it. Don't we?

Quincy Krosby:

We pay more for insurance across the board. Apparently, according to the analysts who covered the insurance industry, that is now beginning to normalize. Well, maybe in terms of paying for our home insurance, paying for the auto insurance, which climbed up dramatically coming out of covid. Expectations are that it is going to normalize, meaning coming down. Also, probably one of the most important and widely followed areas because it has such a large relationship to where CPI is headed and that is the owner's equivalency rent. So in other words, it's not what I paid for my condo. It's not what I paid for my house. It is what I can rent it out for. And we know that rents have remained sticky, sticky higher. Now the expectations are that little by little, that is going to come down and it will be, by the way, with the new leases that are coming up, new leases. Now, in certain parts of the country, those leases are remaining high.

Quincy Krosby:

But overall, we're starting to see that those leases, the new leases that are being signed, are coming down even at the margin. This is good news because that is going to help bring down CPI. Maybe not in this report, but certainly as we go month after month. Now last week too, I want to go over that payroll report because we've gotten a lot of questions on it and why? Because the number, the headline number over 200,000 new jobs shocked the market because the expectations were that we'd only have about 185,000 to 190,000 jobs. It was well over that, but we also saw that wages were higher. So that's important. But also that the unemployment rate climb to 4%. Now, in this call, I don't want to have an economics lesson for everyone, but there are two different surveys that are used and we have to be cognizant of that.

Quincy Krosby:

However, however, if the unemployment rate continues to climb higher, at some point it is going to show up. It's going to present itself in the number of jobs that are created. Remember, because Chairman Powell has said over and over again, he's the head of the Federal Reserve, that if the unemployment rate climbs higher, because typically when it does start to move higher, it gains, it quickens in terms of momentum. If that were to happen, he has said we are going to cut rates. Remember, the Federal Reserve is a dual mandate central bank. One is the labor market and the other is price stability. So we are going to keep our eye on that as the Fed meets this week. And this week, what they will have that will come out in the morning before they come out with their statement will be the CPI report. We want to hear what they have to say about the path of inflation, the path of disinflation, meaning inflation coming down and whether or not they expect any rate cuts to come.

Quincy Krosby:

When do they expect it? Right now, the market is expecting a rate cut in September, but it is not as strong a probability at this point. Actually, it is November and December with stronger probability. But as we get to those months, there will be so much data coming out in terms of inflation that obviously the forecasts are going to change. The other part of this story for this week's Federal Reserve meeting is the dot plot. Oh yes, the dot plot. But remember, it was the dot plot many, many meetings ago that suggested rate cuts. Remember that? If we go back many months ago at a Federal Reserve meeting, the dot plot suggested that they saw rate cuts and that got the market all excited. Let's see what that dot plot actually suggests when it is introduced this week. So this week, a lot focused, a lot based on what we get from the CPI report and what we have from the Federal Reserve meeting.

Quincy Krosby:

Also this week, and this is tomorrow, and something I pay very close attention to, happens to be the National Federation of Independent Businesses. These are the small business owners responsible for a very strong representation in terms of new jobs. This is their optimism index. And, you know, it remains low, but it is expected to climb just a tad higher. But when we look under the hood, what we're going to see is are they still worried about inflation? Are they still worried about prices paid? Ultimately, what we know about small business owners is overwhelmingly, that they are focused on sales. Are they going to have new business? That's what they're focused on. So hiring expectations is predicated, is based on, how they see new sales. So that is going to come out tomorrow, Tuesday, and I, for one, will be paying attention to what the small business owners in this country have to say.

Quincy Krosby:

Also, this week we have, and this is today, it is Nvidia, right? This is their stock split. So we're going to see how that affects the overall market. This week also is the Apple Conference. This used to be probably the most watched consumer technology event conference that you have, but right now it is important because Apple is in so many portfolios, a cross section of portfolios. You see Apple stock, nevermind that it is a member of the Dow Jones Industrial Average, and of course, it is in indexes across the board. The market is hoping, hoping upon hope that they have something that will come out and just wow, wow the markets, because clearly they missed out with the headset that they introduced that, you know, nobody could use, nobody wanted to pay that much money. The upgrades that they are expected to announce should be based on the analyst reports and the rumors and hopefully for Apple stock must haves.

Quincy Krosby:

So that's always the way it is. Is it a must have? Am I going to pay up for something that I must have? And we will see what happens when they make these announcements this week. This conference has been in existence in the early 1980s, but it wasn't until about 2002 when Steve Jobs used it as a launching pad for new products. And remember, it wasn't just the hardware. Pretty soon we started to hear about services which had become a very important component for Apple revenue. Those are the services, not necessarily the hardware. So we're going to see if Tim Cook, who has done a masterful job, the upgrades in Apple, whether or not these upgrades are going to be must haves. That's what I call it. Must haves, as a consumer. Oh my gosh, do I have to have this? Do I need to spend more and is it going to be that important for me to have it?

Quincy Krosby:

And we're not just talking about U.S. consumers, we're talking about consumers worldwide. So it's going to be very much watched and we'll see whether or not the market actually, or shall I say, rewards Apple with what they are announcing. So we have that and we have Nvidia. And overall, it is a market that is very much focused on the Fed meeting this week and whether or not inflation continues its path towards 2%. Also this week, and I want to end the call with this, the Eurozone has been shaken up with the events that happened in terms of the parliament, but not the parliament in the respective countries, but it is within the big European parliament. You remember, obviously we all know what that is and what has happened. We saw in France, we saw in Germany, and I can go on and on. In Italy. That the right-wing parties gained and gained handsomely to the point that the French now are calling an election, a snap election, to see whether or not Macron can maintain his lead, whether or not his party, which is not a right-wing party, can maintain its lead.

Quincy Krosby:

This is important. We can see that the European market sold-off, and now again, snap elections are being called. We also have what is kind of a snap election in the U.K. and this is sort of the other way, tilted the other way. This is where the conservatives, and they are not considered right-wing. But where their lead has been dwindling and where labor is now set to gain when they have that election in early July. I believe it's July 4. So a lot of upheaval right now in markets, political upheaval. And, last but not least, is what happened in Mexico in which the leadership is with the first woman president in Mexican history, but where the representation in the election has pushed the parliament deeper and deeper into her party. She represents the party that was in place before and the market is worried that she will try to push, given that she has so much power now via the lower house, the parliament and the number of seats that she will push it more towards the left.

Quincy Krosby:

The market has been worried about that. In India, the prime minister Modi has actually gained a third term, which is very rare, by the way, very rare. The expectations were he would win a third term, but with a much stronger majority, and particularly in India's parliament. And that missed. The expectations were that his mandate would be powerful, would be extremely strong. That did not happen. However, he has been able to form a government. He will be the prime minister. Actually, he was sworn in yesterday. And the question now is the composition of his cabinet. Obviously, he is going to try to have most of his former cabinet come in. The question is how much, and here's the important part, what will be their portfolios? Especially the finance portfolio because the market is watching to see whether or not Modi can continue, continue to introduce reforms and not just reforms about helping on a welfare side, which is very important in India.

Quincy Krosby:

That's one of the reasons he did not receive an overwhelming majority. But whether or not they can continue with the pro business platform that he introduced and he pushed through. The market is questioning this. Money has been coming in mainly from domestic sources, mutual funds and banks. The question is, what do global investors think? Global investors that pushed India into a special class, so to speak, of a introduction of pro business, pro economy, pro economic gains. And India, by the way, their gains were about 8% coming in at the top of the ledger for, not just emerging markets, but for all economies globally. So a lot is riding on that, and we'll have more news on that as we go through the week. But it is a very big week for international. It's a very big week for global. And global includes the United States of America and the Fed meeting this week.

Quincy Krosby:

Do they give any hint that they are prepared to cut rates? And if so, when? Thank you all very much. We'll be back next week. Thank you.

Quincy Krosby:

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Quincy Krosby:

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