From Key Earnings Reports to Fed Meeting — Crucial Week for Markets

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, and it is Monday morning, April 29. Thank you for joining me. This week is incredibly important for the market. The Fed is meeting this week. I'll get to that in a minute. We have a payroll report due. We've got a number of important economic data reports coming out. But the other thing is we've got the slew of earnings reports this week. Last week the market was under pressure for a couple of reasons and important reasons. First of all, the first quarter GDP report. Remember we always have three reads on a report. So it'll be revised another time. It'll be revised for the third time and that will be the final report. But the first report for the first quarter GDP came in at 1.6%, down quarter over quarter.

Quincy Krosby:

And this is not what the market wanted to see because in addition to that, the Personal Consumption Expenditures price index, the PCE, the Fed's preferred report on inflation, came in higher than expectations. Not all components of the PCE were higher. There is the headline, there is the core, there's the super core. We won't get into that here, but just the notion that it didn't come down, that we didn't see inflation pushing lower, that the trajectory didn't gain momentum to the downside, had the market initially convinced that this was horrible, horrible combination, slower growth and inflation not coming down at all. In fact it's staying and remaining elevated. All of a sudden when the reports came out, it was oh, stagflation is taking hold. Stagflation is dangerous. And it is where the inflation is high and the economic growth is doing just what it says stagnating.

Quincy Krosby:

However, when we look at the components of the report, the 1.6%, what we saw was seasonality. Seasonality. And I wanted to say first quarter GDP is very much focused on not just what's happening here in the U.S. but elsewhere in the world. So here we had exports down and inventory building slowing and imports up. It also reflected the fact that U.S. consumers continue to spend. Now I do want to mention that the expectations were that we would have GDP reported about 2.3, 2.4%. We will see whether or not we reach that in the second print because again, typically the first quarter GDP, when it is lower is subject to upward revisions. The other aspect that I want to mention though is that we did see that consumer savings are down, which is not a good thing. And we also saw, above all else, that consumers were not buying as much in terms of goods rather than we were spending on services.

Quincy Krosby:

This is also fluctuates because this week we'll find out whether or not we've been buying vehicles. Typically, when we buy vehicles on auto sales go up, that typically, you know, kind of dents how much spending room we have considering how expensive vehicles are. But nonetheless, nonetheless, the market finally came to grips and said, okay, this isn't as bad as we thought. This isn't a, you know, a death nail to the U.S. economy, not by any means. And the market was able to adjust and the 10-year Treasury yield was able to pull back. I want to also add here of how quickly the 10-year Treasury yield has climbed. At the beginning of the year, the 10-year Treasury yield was at 3.94%. And when we closed on Friday, the 10-year Treasury yield was at 4.62%. We are watching this very closely because there's a line in the sand that many of the analysts believe will get us to 5% quickly, and that is if we start closing, not intraday, but if we start closing at 4.7%.

Quincy Krosby:

So the market is very much focused on that. Also, I do want to mention that in terms of what we're hearing from companies, which really matter because the market had a, okay, what about the worst scenario here? The Fed doesn't cut rates at all in 2024. The Fed stays higher for longer. What happens then? Well, you need a substitute, don't you? You need something else and that would have to be earnings. And so the market was obviously very concerned that earnings were not going to be strong enough. But yet yet, Microsoft came out, their guidance was strong. Alphabet came out strong. And what those two companies indicated and was extremely important for the market, was the utilization of AI, artificial intelligence, because obviously it's costing a lot of money. The innovation to have AI, generative AI, be embedded in your company's operations and building of new products.

Quincy Krosby:

At some point that monetization has to be clear for the market and both Microsoft and Google were able to do that. So this week we are paying very close attention to what Apple has to tell us and also what Amazon has to tell us. It will be important for the market. Doesn't mean that we don't have other earnings. Of course we do. This is one of the biggest weeks for earnings. We're going to hear from 3M. We're going to hear from Coca-Cola for example. Across the board, the earnings are going to come in. What we're interested in is guidance. We're interested on what they hear from their customers, what are they hearing from their clients. And I also want to point out that earnings are doing well, that we are starting to see a pickup in the results. So sometimes when we look at FactSet, everyone has a different analytics that that they follow.

Quincy Krosby:

But we tend to like to look at FactSet and we look at some others, but they look at the blended results, which are the actual results and also the expectations. So they blend that. Actually climbing higher. So this is a good start to the week and we expect to see, again, we expect to see that earnings come in and they do better than expectations. And that's at the end of the day, that is good news for the market. Also this week, I do want to add there are other reports coming in other than the Fed. We are going to have the payroll numbers. Oh yes, at the end of the week, as we always do on Friday morning, the expectations are that we will have somewhere between 243 to 250,000 new jobs. We will watch to see whether or not the previous month, which was 303,000 new jobs, was it revised downward?

Quincy Krosby:

Yes, because we've seen a pattern of downward revisions. And that is important to give us a sense of to the actual health of the payroll landscape. Also, the expectations are that the unemployment rate remains at 3.8%. Hourly wages, as everyone knows, are crucial. You don't want hourly wages to collapse, but you don't want them to climb higher. And to repeat myself over and over again, is that if hourly wages start climbing higher companies are going to try to raise their prices and that of course becomes inflationary. So we're going to be keeping our eye on that. And the other thing that we're going to look at is where are the jobs coming from? Are there government jobs involved or are there just service sector jobs involved? Or are there white collar jobs involved? Because we hear two different narratives. One is that companies, not just the ones we read about, but companies are cutting and trimming their white collar back office workers, the white collar workers that are jobs that pay well, that companies are more and more inclined to trim those, not cut dramatically to the core but trim them.

Quincy Krosby:

So this is going to be important to see where those jobs are coming from. In addition to the payroll report, we're also this week going to have a report on consumer confidence. And we have a number of those reports, right? Different consulting firms offering their results. The expectations are the consumer confidence is edging lower. We saw that on Friday with the University of Michigan's, well-known, highly followed, consumer confidence report. It edged lower but deep into that report is something else. And that is what U.S. consumers are saying about future inflation. And you know what they're saying that it is moving higher. That is not what the Fed wants to see because it is very difficult for them to in essence break that. Now we know the reasons. One of it is that energy prices are climbing higher. That has an almost immediate effect on consumers, but it is also very difficult when that mindset picks up and stays intact.

Quincy Krosby:

Well, I don't know, you know, maybe I should buy it today because you know, it's just going to be more expensive tomorrow. That helps perpetuate overall inflation. So that was not good news in that consumer confidence report last week. And consumer confidence actually overall ticked lower. This week, also very important is the ISM, Institute for Supply Management, manufacturing report coming out on Wednesday. The first one will be for manufacturing, expectations are that we see manufacturing remaining in expansion territory. That means it's over 50%, perhaps edging lower. But drilling into it, and this is why it's important because we have a tremendous focus on inflation. Whether or not prices paid, prices received, have they climbed higher or have they leveled off or are they lower? This is very important for the market and for the Fed. And also we will have the service sector, which of course is the largest component of the U.S. economy.

Quincy Krosby:

Expectations are that it remains in positive territory, which is over 50%. And again, we are going to look to see prices paid, prices received, whether or not that has marched higher. I can't stress that enough, given the sensitivity that we have now about inflation. That takes us back to the, I think the lead lead in this week's market. And that is the Fed meeting. The question for the market is really what does the statement say and how does Chairman Powell discuss it? Does the statement suggest that the U.S. economy is slowing and slowing, you know, at a faster clip, giving credence to that 1.6% first quarter GDP report? Or do they suggest that the economy is growing at a faster pace, although that it is slowing from the GDP report we had from the fourth quarter, which was just over 3%. It's going to be important. Also, do they see inflation climbing higher, escalating or do they see it as temporary, having more to do with energy costs?

Quincy Krosby:

And then comes the chairman's press conference. We have to go back to December from that press conference from Chairman Powell where he delivered a pivot, a soft pivot, and which he openly talked about, you know, the possibility of rate cuts. But I also want to point out that not only did he talk about it, but the committee, the Federal Open Market Committee themselves talking about two or three rate cuts this year. And then we had one of the leading pragmatic hawks. I call him a pragmatic hawk, he was talking about it. This is important. We also had many of the doves on the Federal Open Market Committee who believed that we would have three rate cuts. Suddenly they're in the camp. Well, no, maybe not, maybe just one rate cut for the end of the year. So right now, by the way, the fed funds futures market in terms of probability, has essentially one rate cut.

Quincy Krosby:

And that would be in September. The market's view is are we going to have a rate cut at all? Are you going to raise rates if inflation climbs higher? And what would it take you, the Fed, to actually cut rates? Is it just that the economy deteriorates, that the labor market starts to fall? But that is not what the market wants to hear. The market really wants to hear that at some point the Fed will cut rates, but they must be absolutely sure that inflation is not stalling anymore and that it is coming down at a faster clip. So, this is a market that is very much focused on the data releases this week, on the earnings, there's no doubt about that. But I can't stress how important this Fed meeting is. And let's keep in mind that at the beginning of this year, the market was pricing in six rate cuts, including one at this meeting that we have this week.

Quincy Krosby:

And that has just dissipated, that has just waned. So also with the Fed remaining higher for longer financial conditions have been tightening, which by the way is one of the criticisms about Chairman Powell's comments when he offered this dovish pivot last year, that he shouldn't have done that. He should have kept the narrative going, we are higher for longer and not added this dovish pivot. Giving the market a false sense that we were going to have a number of rate cuts and thus making financial conditions much easier. No, now financial conditions, we'll see what he has to say today and what the statement says, but it has been tightening. How do I know that? Because the U.S. dollar has remained strong. A stronger U.S. dollar actually is the reflection of stronger financial conditions and that is not something that's necessarily good because if it remains this way fairly soon, we will hear from companies telling us from the S&P 500, you know, it's been hard for us, 40% of the S&P 500 yes and many of the big tech giants getting their earnings from overseas. So this is why it's important. Anyway, I suggest that every issue in the market this week will be important for the market. That's earnings, earnings guidance, and also watching that 10-year Treasury yield and also all of the data releases that we will have this week. But if I had to guess which one will be most important for the market, it will be the Fed meeting. This one is crucial given that inflation continues to stall.

Quincy Krosby:

Thank you very much. Have a good week. We'll be back next week. I really appreciate your joining me on this call this morning. Thanks so much.

Quincy Krosby:

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Quincy Krosby:

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