Key Inflation Data, Earnings Season Begins, and Fed Speakers All Week

Quincy Krosby (00:00):

Hello from LPL Financial. Welcome to The Talking Point. I'm your host, Quincy Krosby. Good morning everyone. It's Quincy Krosby. It is Monday morning, it's January 8th. Thank you for joining me on the Talking Point. There is a lot to talk about. First of all, before we start this week, which is extremely important as we begin the fourth quarter earnings season officially last week, the report that came out on payroll was interesting because it was above as estimates. Estimates were about 177,000 new jobs. We went over to just under 220,000 new jobs, 216,000 new jobs. And we had two downward revisions from the two months before. Still even with that, when we looked at the, you know, components of that report, one thing that stood out and that was that wages still we remain elevated. That's something the Fed does not want to see because again, to repeat myself every single week, that when you have to pay more for your input costs, which is exactly what wages are, you're going to try to get it back by pushing prices higher.

Quincy Krosby (01:11):

Don't know if it's going to work for companies, but the fact is they will try to do that. Then the other issue here is that we saw the work week was slower, fewer hours. That's not good. We don't want to see that because what that suggests obviously is that companies didn't need their workers the whole week. And then on top of all of that, what we look at is those who have left looking for jobs. So what happens is when folks say, I'm not going to be looking for jobs, you know, I'm not going to get a job, I don't want a job, and they leave, they leave that market for looking jobs, what happens is the unemployment rate actually goes down. The unemployment rate remains at 3.7. But all told, all told on this report, resiliency of the labor market continues. So whether or not, you know, we argue about all of the various components and the reason, major reason, not the whole reason that the unemployment rate stayed at 3.7%.

Quincy Krosby (02:12):

You take it and you put it all together and what you see is it's still solid. It's still solid, which then translates into consumers that actually feel a bit more secure. We've seen it in the consumer sentiment surveys, but then we'll have a tendency to spend a bit more. Remember consumer spending, 70% of our economy. This week, we go into this week with quite a bit to look at. One is CPI, Consumer Price Index, coming in on Thursday, Friday, the Producer Price Index. You know what we're looking for. We're looking to see core inflation coming down to a level that for a Fed that is extremely data dependent, that they start to see a faster clip of bringing down that core inflation. And the market will be paying very close attention to that. And the Producer Price Index that comes out then on Friday. And the reason that's important is that we want to see the prices because we've seen a couple of reports, some suggesting that producer prices have risen and some actually suggesting that no, not so fast.

Quincy Krosby (03:21):

However, a good portion of the group that says, well, we are seeing prices come down in terms of manufacturing. Some of that has to do with all prices coming down. And I go back to that because there are reports that all prices are climbing across the country, including gasoline prices. So all of that comes in and is a focus for the market. And then we have the earning season beginning, the official earning season for the fourth quarter. And that begins with the banks. Why are the banks so important when we hear what they have to say? Because they cover every aspect of the economy and we're going to be listening to what they tell us about their customers, credit cards, who's buying, who's spending, and who's having trouble paying those back. That's going to be important to get an assessment of the local economy.

Quincy Krosby (04:12):

Not to mention the broader economy because again, because of the number of banks that we will hear from just on Friday, and then again next week, you're going to get a very smart picture about where we are headed. Remember that's what we're looking for, not where we've been, but where we are headed. And this also brings up another point. The market is trying to assess whether or not the economy is slowing at a faster clip or is it going to surprise to the upside? And again, right now, when we look at the broad picture of the GDP forecast for the fourth quarter, it is in the range of 2% and we'll see if it moves higher, if it moves lower. But again, the market is focused really on whether or not the Fed begins rate cuts not in the January meeting, but in the meeting in March.

Quincy Krosby (05:10):

That's the one that they're focused on because there, we had been in the Fed funds futures market, the probability was over 80% chance that they would cut rates in March, that would be March 20th. But that has come down now with all of the inflation-related data put together, that market is now suggesting that that could be below 70% probability. As I do this call this morning, it is at 67% probability, that's more than 50% obviously, that they will cut rates at the March 20th meeting. But there's an awful lot of data to come before then. And this market to repeat is data dependent. The Fed is data dependent. The Fed fund's futures market is stated dependent, and the economy clicks ahead. And the fact of the matter is that the biggest question will be earnings. Whether or not, whether or not as we come out of the earnings recession, will we see a pickup in top line revenue growth?

Quincy Krosby (06:14):

If, and this is it, if the economy slows too much, are we going to see it? Or are companies strong enough to manage their bottom line? So all of this and the guidance we hear from companies and the banks are going to be very important to make that assessment. And then the other aspect to all of this in terms of inflation is that embedded in the report that came out last week on Friday, the employment report, were wages that wages remain higher than the Fed would like. Remember, all of these strikes that we've had have been pro-labor, and that means higher wages, higher benefits. So we'll hear again from companies in this earning season in terms of their guidance, what they are saying about wages in their respective industries and the respective companies. And that's going to be important, very important for the overall tone of the market.

Quincy Krosby (07:09):

Number of people have asked about this slowdown, the sell-off that we've seen at the beginning of this year. Remember it started the last trading session in 2023, but the market has been over bought on the short-term and the medium-term. And then if the selling continues, we will reach an oversold situation. But this morning we have also good news for the market, actually for the, for the economy. And that is Congress has been able to carve out a deal to keep the government open until the next shutdown. There's more work to be done on the deal, but they've started and it looks extremely promising. So that's a positive for the market. A negative for the market this morning, you know what it is, it is Boeing. And take a look at the Dow. Dow futures are down. We'll see if any news comes out of Boeing that can placate the market, assuage fears that they've got this under control.

Quincy Krosby (08:07):

I don't need to go over it. It's been all over the news. And this is extremely important because also it may cut back on some of the earnings. A number of the airlines are cutting the flights, especially this week, until they have a broad understanding of their own fleets that they've got that are under questioning. So again, a lot for the market to absorb, but we're going to pay a very close attention to more information about Apple because you know how strong Apple is in the indexes in terms of their weight, its weighting. Much of it has to do with questions over sales. In China, the China market is extremely important for Apple, but there's a competitor that is being pushed by the Chinese government and that's the Huawei smartphone. But then the other side of that is, what about if the U.S. economy slows and the global economy continues to slow?

Quincy Krosby (09:03):

Will there be an appetite, so to speak, for the Apple smartphone? There's also an issue for Apple with regard to the U.S. government and a possibility of action from the government in terms of Apple's pressure on keeping their products and where you can't go in and have any other product mix. So this is all going to be very important for a company that led the market in terms of its market capitalization and is important because of its weighting in all of the indexes. So we're going to pay attention to that as it affects the overall market. So a lot for the market to digest and quite a bit of consolidation. We will be back next week and we will be paying very close attention please to the Consumer Price Index. Very important. I know everybody says the Fed likes the personal consumption expenditures index as their preferred, but the fact is that the market also looks very closely at the Consumer Price Index. And that's this week's biggest news coming on Thursday, a price index on Friday. Have a great week. We'll be back in touch next week. Thank you.

Quincy Krosby (10:13):

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 or 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.

Quincy Krosby (11:12):

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 are 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-I-A or any other government agency, not bank or credit union, guaranteed not bank or credit union deposits or obligations and may lose value.