Important Inflation Data This Week

Speaker 1:

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's Monday morning, May 13. This is an incredibly important week for the market. Inflation Data will be extremely important for a market that continues, continues to hope that there could be rate cuts this year. Right now the market is expecting a rate cut in September and December, but that's so far off that the question for the market is, is the Fed just going to stay on hold for the entire year or, and this is extremely important, or is inflation going to begin to come down on a more meaningful path, allowing the Fed to cut rates earlier than that? And if that doesn't happen, and this is what the market is trying to figure out now, is if the labor market begins to show signs of deterioration, is the Fed prepared to cut rates? Remember, the Fed has dual mandate.

Quincy Krosby:

One is what we call the labor mandate. It is to provide an environment of sustainable economic growth and that is for the labor market. And then of course, we all know the other mandate, and that is to create an environment for price stability, which is that 2% target that the Fed talks about when they speak about, you know, what their goals are to provide price stability. So the question for the market of course, is this, if the labor market were to deteriorate, meaning that unemployment continues to climb higher, the question is quite rational is what happens to the consumer. What we know is that consumer spending slows when the labor market weakens. And why is that important as I repeat day after day? It is that the consumer is about 70% of our economy. So there's the other aspect to this, is all of the data suggesting that the consumer savings has come down and not just come down, but has basically that extra savings that we enjoyed, quote unquote enjoyed during Covid and all of the money that came into our accounts, that that has been depleted.

Quincy Krosby:

And therefore, as prices remain high, particularly for food, particularly for insurance on our vehicles and our houses, the consumer is being grabbed by these expenses and has less ability for discretionary spending. This is why when we look at the market itself, we pay attention to consumer discretionary and consumer staples. What we do know is that consumers are actually spending more money on non-brand items, those off-brand items. We're going to have a very good idea about the consumer this week as Walmart comes out with their earnings and it is going to be dissected to see what are consumers paying for? Are we seeing, remember Walmart had talked about this, that they were seeing people coming in with household incomes about a hundred thousand dollars or more. They never saw that. They didn't see that until the prices kept rising and these consumers were coming into Walmart to go grocery shopping.

Quincy Krosby:

Needless to say, Walmart wanted them to buy more items with higher margins, but they started to come in to the Walmart stores, increasingly. And so we're going to listen to what Walmart has to say about what consumers are buying and which consumers are buying. One last thing about this, I get questions. So how does Walmart know about consumer household incomes? Ah, it's the credit card information that they get. Oh yes. So, but nonetheless, it's going to be important and that will be later this week. Also this week, obviously it is a week that we're going to be focused on whether or not prices are coming down, and that will come tomorrow, Tuesday with the producer price index. This will be very important for the tone of the market and also for Treasury yields. One of the things that happens is that when it looks as if the producer prices continue to stay higher without coming down, it suggests that stubborn inflation is taking hold.

Quincy Krosby:

And what happens then? The market starts to think, well, the Fed is just going to have to be on hold much longer. And that tends to push, by the way, the yields higher in the Treasury market. So this is going to be tomorrow morning, the Producer Price Index, extremely important for the market. And then on Wednesday, and this is why we're calling this inflation week, the Consumer Price Index comes out. This is key because what we have seen is that the numbers are inching higher or remaining stubbornly tight and not coming down fast enough. We'll see where this goes. I want to say that expectations are that as we look at the consumer prices, some of the numbers will be higher, some won't be higher. What we're looking for is a trend and are we starting to see that last mile of inflation moving lower?

Quincy Krosby:

We call it the last mile, going down towards price stability. Is it unsticking? Is it starting to open and start to move down a bit? That's what the market is looking for and obviously that is what the Fed is looking for. They want to see that it's beginning to climb lower. Obviously, a good portion of this, especially in the CPI, Consumer Price Index, about 30% is owner's equivalent rental. This is not what we sell the houses for, sell the condos for. It is what you rent it out for and where are rents right now. Earlier rents are still high. However, the newer contracts are starting to come in a bit lower and that is going to take time to become a major trend that changes that part of the Consumer Price Index. But the Fed is watching this and watching all of the data coming in suggesting when that will happen and how quickly it will happen.

Quincy Krosby:

Because once that starts to move, oh yes, that path of inflation slowing based on the way they analyze it, will actually give them confidence, finally, that they can begin to cut rates. But as we stand here right now talking about this, the Fed remains worried about inflation remaining sticky and they worry about at the same time, they worry about their lower income workers unable to pay their bills as rates have climbed higher across the board and whether or not the employment landscape is going to remain strong enough to keep workers the way we've enjoyed a strong labor market. Once that deteriorates, the Fed has made it clear, especially Chairman Powell, that the Fed will come in and lower rates. For the market, that is not what they want to see. Obviously, what the market wants is a still solid backdrop for the economy, but also where inflation comes down and the Fed has the ability to lower rates this year.

Quincy Krosby:

So we're going to get, on Wednesday, we're going to get the Consumer Price Index. We're going to get retail sales. Obviously, everything is about the consumer, so this is incredibly important. Expectations are that retail sales have slowed. We've seen that in a number of reports. And so the question is, does it show up in the April data? So we will be getting April data in this report. We're also going to get the home builder confidence, but that will be for May. And expectations are that that is down just a tad. As well this week, an awful lot of Federal Reserve speakers, they are coming out. But I'm going to be paying very close attention to Chairman Powell. He is expected to be speaking on Tuesday. That's tomorrow and we'll hear what he has to say. It's extremely important how he is going to be talking about inflation, especially as the University of Michigan consumer sentiment report that came out on Friday morning showed that consumer sentiment has come down very much, very much as consumers are worried according to the data of the University of Michigan survey, that when we look out one year, we look out five year that inflation is going to continue rising.

Quincy Krosby:

That's something that the Fed does not want to see. It's difficult to break that mentality because what that mentality suggests is, well, you know, if inflation is just going to keep going up, why don't I buy things now? Because inflation is just going to keep rising. What that does is it perpetuates the inflationary cycle. So we'll hear what Chairman Powell has to say along with other Fed speakers this week. Also, this week we get the manufacturing reports, and remember manufacturing has done an about face. It had climbed above 50, which by the way, is that line that puts us in expansion territory and it has pulled back just a little bit below 50. So what we want to see as we go through the surveys on the manufacturing side across the country, we will pay attention to both the Empire Fed Survey, which is basically greater New York and the Philadelphia Fed Survey.

Quincy Krosby:

Expectations are that it still remains light, but all we want to see is there an improvement. Other thing we're looking for is expectations for hiring and new orders. So these numbers are going to be extremely important in the market that is now worried about labor market, worried about consumer spending, worried about inflation. So all of these numbers are going to be extremely important for the market. We'll also have industrial production this week, which also gives us a handle on the economy, what are we manufacturing and how heavy is industrial production. This week also we'll have another report on U.S. leading economic indicators, and that has been in negative territory. And again, this is where it becomes difficult. The data that we actually have basically says why are economic indicators pulling downward. This would be for April. By the way, the market is so very much focus on saying the economy may be slowing, but it's still solid.

Quincy Krosby:

It may not be stellar, the way it was a couple of months ago, but it still remains resilient. And as long as the market can believe that the economy is resilient as opposed to, you know, in essence falling off a cliff, the market should hold up. But nonetheless, we are paying attention to the everyday market and the sectors leading the market higher. It still has been overwhelmingly bullish. We saw the semiconductors starting to pick up again, this suggests, obviously, global demand is higher, but we've also seen consumer staples inching higher along with utilities. This is something that bears watching because if consumer staples start to lead the market and we start to see utilities continue to lead the market, it's a suggestion of that the market believes, hey, you know, consumers are pulling back, consumers don't have as much money. There's concern about the labor market.

Quincy Krosby:

Need to keep our focus on what is the market telling us. In terms of utilities, utilities have a history, historical pattern of climbing higher when that segment of investors and traders believe that the 10-year Treasury yield is going to put in a top, keep that in mind. But now there is another element for utilities. Of course, the dividends are important, but that fits in with the narrative that if you believe that 10-year Treasury yield is going to start coming down, you are going to be looking for a replacement. And utilities have served that purpose, particularly when we had rates at near zero and 1%. But more and more increasingly we are talking about utilities as an important segment for AI, an important segment for creating the necessary power that goes along with the needs, the requirements for AI, the generative AI, the colling of so much information that requires a tremendous amount of power.

Quincy Krosby:

More and more, you're hearing stories about investors, long-term investors, putting money into industrial needs that are associated with the industrial power and putting money into anything associated with the electrical grid. Now that may not be as powerful, so to speak, as the headlines suggest. So we want to be careful and pay attention to this, but I want to point out that it is becoming a story that we are hearing more and more of that the power needed is going to be dramatic. Oh, it's one of the reasons, one of the rationales given for why we have seen natural gas prices beginning to climb higher. They were practically dormant just so much time. But they obviously, if you are following this story about the need for greater, greater power generation, the natural gas story is one that is being attributed to that, the higher prices. So there's a lot for this market to absorb this week, but especially it'll be about, yes, it'll be about inflation, it'll be about whether or not it is starting to unwind and starting to inch lower. That's what the market wants to see because that will go directly in to the probability of earlier rate cuts. Have a good week. We'll be back next week. Thank you.

Speaker 1:

This material was prepared by LPL Financial. It's for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed as suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principle. Any economic forecast set forth in the podcast may not develop as predicted and are subject to change. References to markets, asset classes and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance reference is historical and is no guarantee of future results. All information referenced in the podcast is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy.

Speaker 1:

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker dealer member Vera and SIPC ensure its products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, that is not an LPL affiliate. Please know LPL makes no representation with respect to such entity. If your financial professional is located at a bank or credit union, please note that the bank or credit union is not registered as a broker dealer or investment advisor. Registered representatives of LPL may also be employees of the bank or credit union. These products and services are being offered through LPL or its affiliates, which is separate entities from and not affiliates of the Bank of Credit. Union. Securities and insurance offered through LPL or its affiliates are not insured by the FDIC or N-C-U-A-A or any other government agency, not bank or credit union, guaranteed not bank or credit union deposits or obligations and may lose value.