It’s All About Friday’s PCE Inflation Report, the Fed’s Preferred Index

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. It's June 24. And this has been a really interesting market. And the reason I mention this is that the market really... when we get into what we call "overbought scenarios," which means that technically, the market is poised for a pullback. The market then just comes in and says, no. Not so fast. But nonetheless, nonetheless, it's important to keep in mind these technical indicators around oversold markets and overbought markets. When you have an overbought market and the market does pull back and then reaches oversold territory, then we look for a catalyst to bring the market back up. So we have been watching this for some time. Every time we get to overbought scenarios, it takes a very long time to get that memo into the market.

Quincy Krosby:

Still, there's an awful lot for the market to digest this week. Now, before we get to this week, let me mention a couple of things about last week that really are important because what we have is a series of mixed signals for the economy and therefore, for the market. One part of this, when we look at it, we had the S&P Global Flash reports and those reports, you know, when you get to the actual reports, have the service sector, which is the largest part of our economy, climbing higher, and also even manufacturing, climbing higher with, with the prices paid components actually edging lower. Then you've got other data suggesting, woo... Hey, you know what? The economy's not doing well. The consumer is pulling back, and we are seeing this. There's a cooling in the economy, but the question for the market is how much of a cooling. A cooling could be that, you know, we're slowing down a bit.

Quincy Krosby:

But then it could be whoa, wait a minute. We're looking at a recession. Or as I'm seeing in the headlines, how about a shallow recession still allowing the, you know, the Fed to cut rates, which they would if they saw a recession coming, but where it really wouldn't damage the earnings. And that's really what we're looking for. Now, also keep in mind that we have finished with the earnings season for the most part. I'm going to get to where there are earnings this week, which will be important, but the market always needs these catalysts to keep moving higher. So let me go over this for this week. In terms of earnings, we're looking at FedEx. It is a bellwether, a global bellwether. Now granted, when we hear from FedEx, there are actually FedEx specific issues that the company has to deal with and the market has to assimilate, but they also give a very interesting picture of demand of what's moving in global markets.

Quincy Krosby:

And that's why the market pays attention to what they have to say. And also this week we'll hear from Micron, which is a chip maker, and we are all about the semiconductors so we want to hear what they have to say. That's Micron. And then also on Thursday, we will hear from Nike. And again, this is important because we're taking a look at the consumer at all levels, all levels across the board, and we know that they have an important brand. And that brand has actually, in sales, we're coming down. We want to see what they have to say about the consumer. And it's not just the U.S. consumer, by the way. It is the global consumer. And also, and one that I pay very close attention to because people are going on cruises and that tells you, well, wait a minute. If the consumer is in such bad shape, where are they getting the money for these cruises?

Quincy Krosby:

We have high-end cruises, but we have more mainstream cruises and we'll hear this week from the largest. And that's Carnival. We want to hear what they have to say about are they seeing a pickup in demand for Americans? And they do have some outside of the U.S. cruise tickets, so we want to hear what they have to say. Also, this week, we are going to have another look at GDP for the last quarter. This will be a revision. We'll see if it climbed any higher or did it go lower. But remember, the market now is looking ahead, but by now, we're looking like, okay. We understand that's looking back. We are trying to look forward. Nonetheless, we will see if there was any pickup whatsoever in the revision. And right now, as we look at the market this week, we are looking at Friday. Friday is important for many levels.

Quincy Krosby:

And let me go over this. First of all, it is inflation. And we know we are focused on inflation because the Fed is focused on inflation. And this is the PCE coming out on Friday. The Fed's preferred measure of inflation. It is the Personal Consumption Expenditures index, the PCE. And right now, the consensus estimates, by the way, are showing that the core PCE may be pulling back just a tad, which is what the market wants to see. They certainly don't want to see it going higher, but what they want to see is month over month, year over year, just pulling back just a tad. And right now consensus estimates suggest that that is exactly what we will see. And that would be very helpful for, obviously, for the market because the market is translating everything into how does the Fed see this? Is this enough to give them confidence to come in with a rate cut right now? Obviously, it's September.

Quincy Krosby:

Do they have that confidence to go ahead with a rate cut? It'll be important. Also this week, you are going to see home prices. You're going to see consumer confidence. And one other thing that we are very focused on, and that is initial jobless claims. Why? Because they are a leading indicator for the labor market. The labor market, the link to us, the consumer is as strong as it can possibly be in the sense that our consumer spending, according to all the data has slowed down. And, you know, if we start to see the labor market really start to lose momentum, the consumer is going to slow down, become even more careful. I'm starting to watch back-to-school sales. I know it's not even July 4, but back-to-school sales have, and when I say not just consumer spending on back-to-school sales, but sales to get you in there. To get you in there to upgrade your children's laptop. Whatever they need. Get them into the big retail names.

Quincy Krosby:

We'll see right now the expectations are that back-to-school sales will be slow. But every time we've seen that, suddenly parents start spending. They go ahead and spend, and we'll see if that happens. The back-to-school sales, by the way, are important to give you a perspective on the consumer, but it's also an important harbinger for the overall sales going into the holiday season. This week, we will have new home sales. Expectations are, by the way, that they actually inched a little bit higher. We will have consumer confidence, one of the many consumer confidence reports that we see. The expectations are on Tuesday that it will pull back just a bit, but we will go under the hood to see what consumers are saying about the economy. And then on Thursday, that's where we get that revision. Expectations are, by the way, it stays the same 1.3%, but we will also have the durable goods orders.

Quincy Krosby:

Very important because embedded in that is CapEx, capital expenditures. What are companies spending? What are they doing? Because it's a sign of confidence if they have picked up spending. And this is on the corporate level. So embedded in that durable goods orders happens to be a segment, a component that tells us whether or not companies are spending. And I do want to say that the overall expectations, and this is for the May reading, is that it comes back down at the headline level and we will also get pending home sales. And by the way, here, the expectations are that it ticks up from a negative the previous month. So again, mixed signals, but let me get back if I may to the initial unemployment claims. If they continue to tick higher, it will be an indication that wasn't just a seasonal climb higher, because seasonality does count.

Quincy Krosby:

I mean, again, across the country, what you have is, you've got folks working in the education systems who are allowed to go and apply for unemployment when the school year lets out. Also, we've had holidays, which sometimes interfere with folks going out to apply for initial jobless claims. So again, the market is very sensitive about whether this is going to continue to tick higher. And remember, we saw the unemployment rate climb to 4%. In and of itself, that's still very healthy. But we're always looking ahead and that first sign that the unemployment moves are going to be higher come from those initial unemployment claims. So this is why every single Thursday morning, this is one of the most important reads. One of the most important prints that we can have. And again, expectations are that they inch just a tad higher. Now, needless to say, continuing claims are also very important and they have been edging higher because what do they indicate?

Quincy Krosby:

They indicate that folks are not getting jobs that quicker. Quicker than, you know, what we've seen over the last number of months, where basically the continuing claims have been rather low. Right now they're still low, but they're inching higher. So we look at the trajectory. So again, a lot for this market to absorb, but Friday is the big day. And that again I want to repeat is the PCE, Personal Consumptions Expenditure index. I love to say it because it's like a tongue twister. And we'll see if in fact the consensus estimates are correct, month over month, core, year over year core down a tad, which would be very good news for the market. I also want to mention one other thing for Friday. You know, everybody talked about last Friday, which was the triple-witching day, which by the way, years ago when I started in the industry, it was called quadruple-witching.

Quincy Krosby:

But because of the way they've changed everything, it comes down to triple-witching. A lot, a lot of trading going on. Heavy trading. This Friday, it's even more so. And this, by the way, is the Russell Reconstitution Day that always comes the fourth Friday in June. It's an annual event, the fourth Friday in June, and it will be this coming Friday. And there is heavy, heavy, heavy movement in the market because of that. I haven't seen it mentioned very, you know, in many headlines. But let me just point out, it has even more significance in the market than what we saw last Friday with the triple-witching. And so we will keep our eye out on that to see, because also, again, it is going to come on the heels of that PCE report, which the market and the Fed anxiously awaiting.

Quincy Krosby:

So overall, this is an overbought market and with an overbought market, just to wrap this up, you are looking for something that takes this market and pulls it back down and pushes us into oversold territory. Oversold territory is kind of what you want. Many of those waiting to get into some of these names, waiting for that pullback. No one's talking about, you know, dive in the market. No one's talking about the market collapsing. But just a healthy, healthy pullback. Also, one thing that the market does not want is the collapse in those Treasury yields. Having them edge lower easing just downward is alright, but if a collapse in those yields, that would have the market very nervous because the view would be that it was reflecting, or suggesting, a much deeper slowdown in the economy, which is not what the market wants to see. So a lot for the market to absorb this week, but let's keep it simple. Friday, PCE. That's the Fed's preferred index for inflation, and market expecting a little bit of a pullback. Anything that climbs higher, the market is going to be like, whoa. We have slower growth and inflation is still picking up higher. So take care. Have a very good week, and thank you so very much for listening.

Quincy Krosby:

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Quincy Krosby:

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