Key Inflation Report Amid Heavy Earnings Calendar

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's Monday morning, January 22, and this is the talking point. Thank you for joining me. It is an interesting week to say the least, especially given Friday's market performance. Let me just go over that for one minute. How do I say Taiwan Semiconductor? This may sound odd, but when we were watching the market, one of the moves that came very quickly came when Taiwan Semiconductor, which by the way, is the global leader in semiconductor chips. Taiwan in general is known for the semiconductor businesses that are ancillary to Taiwan Semiconductor. In any event, they had their earnings report, and in that earnings report, it was said that demand is picking up. Demand is picking up, and that just sent a wave into big tech, mega-tech. Yeah, that's right.

Quincy Krosby (01:08):

mega-tech, again, particularly Nvidia. Then there was also a report that Meta, which is old Facebook, was actually buying more processors from Nvidia. So that whole circle, if you will, of the need for more chips because of yes, A.I., Artificial intelligence, what we call now generative A.I., which means more and more processing faster, and also making it actually more realistic. So that just pushed the market dramatically higher, and that's important. It was an important catalyst. Also, last week we had an oversold market. Remember we talked about overbought, how it can continue to be overbought, needs to consolidate. Well, that's what was happening and the market was selling off, and then it became oversold, and that's when you have a catalyst that comes along and basically changes the dynamic for the market. And Taiwan semiconductors earnings report was extremely important for the market. Now, if you hear Taiwan, yes, they're based in Taiwan.

Quincy Krosby (02:15):

And I also want to point out that because of the election in Taiwan for the presidency, the market was very much focused on Taiwan semiconductor to see whether or not the market would turn down and be worried about the fact that perhaps if there was a strong election for the new president who was elected, he's from the party that is against being closer to Beijing, that perhaps all of the semiconductor names would come under pressure with the thought that perhaps this would escalate tensions between China and Taiwan. So all of this, you know, was floating in the market. And so when the election was over, ironically, the next trading session, because it was over the weekend, but the next trading session, as I mentioned, last Monday actually was higher. So the Taiwan semiconductor earnings report came later in the week, and it actually, again, it served as a catalyst and a reminder that A.I., Artificial Intelligence, continues, continues, and spending continues, and innovation continues.

Quincy Krosby (03:24):

Now, the market right now is trading at over 19 times forward earnings. That's high. And it's high because again, those big, big mega-tech names have seen an influx of cash coming in. That's essentially what moved the market. Also, I do want to say though, that the Russell 2000, small- and mid-cap, also participated in the rally, but obviously given, how do I say, liquidity measures, there's no way that they can equate to the power of funds coming into those big mega-tech names. It's not possible. But we also saw, I have to also point out some of the other big names in the market, ExxonMobil, there a handful of non-tech names. They participated, but nothing again, compared with the power of those big names. So in any event, the market has, you know, rejoiced. Now there are questions of, is this really the beginning of a new bull market?

Quincy Krosby (04:21):

Just back and forth, back and forth. But overall, let's just come into this week and look at the data that is going to be very important for the market over the next couple of weeks. Number one is we're going to get the first read of the GDP report for the fourth quarter. And you know, you could say, well, you know, we're looking back now, we just want to look forward. But still what we want to see is whether or not the economy held up. Because after all this is important in terms of the markets assessing when and how much the Fed is going to cut rates. The Fed this week, by the way, if you don't hear people talking about Fed speakers, it's because they're in the blackout period before their meeting at the end of this month. So they stop speaking, which is kind of good, right?

Quincy Krosby (05:07):

We don't have to hear them every day, every second. But overall, the message from the Fed speakers last week was, hold on, we're not going to go jumping in and cutting rates right away. We need to be careful. And this came from both the Hawker side and the Dovish side of the Federal Reserve membership. And so the expectations right now for the fourth quarter, GDP is about 2.4%. Yes, it's much lower than the 4.9% for the third quarter read, but we know that the economy, while still solid, is slowing down. The question is by how much. Now in terms of the treasury market, right? The yields we will see because there's so much information this week, whether or not the yields come down or do they climb higher? If there's a bet in the market, and we don't work that way, but we need to acknowledge it, it is that we may see weaker data this week that perhaps pushes those treasury yields down.

Quincy Krosby (06:05):

And remember the market did well last week and obviously climbed dramatically higher with the 10-year Treasury yield above 4%. So if the data this week come in weaker than expected, watch those yields come down, right? Remember, if weaker economic data pushes the yields down, not up. So this week we will look for some flash reports from S&P Global on the service sector and on manufacturing. And speaking of manufacturing, when we looked last week, the Empire Fed Survey, which is, you know, New York and New Jersey and Connecticut was just bad. I won't go into details, but it was not a good report, but they did show that manufacturing prices inching a bit higher than the Philadelphia Fed, which has a more positive correlation with manufacturing across the country. That was also weaker. It looked as if it's bottoming a bit, but also we saw prices inching higher.

Quincy Krosby (07:02):

We don't want to see that because, remember the first thing that people think is, oh my goodness, stagflation is beginning to show up in the manufacturing process. And this is despite, by the way, the Producer Price Index that we saw the week before, that the PPI, where prices were coming down, not up, they were coming down. And that served as a catalyst for the market when that report was released. So there's much that we need to pay attention to but, in speaking in term of inflation this week, we're going to have the Personal Consumptions Expenditures index, the PCE and everyone by now knows this is the Fed's preferred view of inflation. That's coming out at the end of the week. And it obviously in this environment where everyone wants to game, when is the Fed going to have that first rate hike? You want to see what these reports indicate, and many people always ask, what's the difference between that PCE report and the Consumer Price Index?

Quincy Krosby (07:59):

The difference is the way the data are curated. The PCE, it comes from the business side. They give the information to come up with the report. And on the Consumer Price Index side, it comes from the more of the consumer side of the, the survey. But ironically, and not, and not, you know, it, shouldn't be as big surprise at some point, the two reports do actually show the same picture of inflation. So in any event, we will be watching, the market will be watching very, very closely to see what that report indicates regarding inflation. And I do think then you're going to see you know, an effect, because remember, the Fed remains stated dependent and it matters for the market as well. So the big question will be question whether or not March 20 is still in play right now. It doesn't look like that for the first great cut. Actually the Fed speakers made it very clear across the board, don't look for a rate cut then.

Quincy Krosby (08:56):

Now also, keep in mind, if there is an exogenous shock to the system, something breaks or that data begin to come in very low, much lower than expected you know, you could see a rate cut as the Fed tries to keep a potential recession at bay. And that's important. Remember three scenarios where the Fed can cut rates. One is something breaks and liquidity dries up, and what's liquidity in the market? It's oxygen. It's oxygen where the market just basically closes down difficult to sell anything at a decent price. The Fed would definitely come in and cut rates. We've seen it happen before, not just with this Fed chair, but years and years. They don't want markets to shut down. So that's one scenario and that's not expected by the way. The second scenario is that the economy slows much more dramatically than anyone expects, and that the Fed comes in and begins to cut rates in order to help stabilize the economy.

Quincy Krosby (09:57):

And most likely the first signs will come from the labor market. We'll start to see a major uptick in initial unemployment claims last week. That number was extremely low for initial unemployment claims and even continuing claims was low. So we don't expect that, but I just want to point out that's where you would see pressure in the labor market, those initial unemployment claims just climbing dramatically. And we don't see that. And the other one, the other reason for cutting rates is that the inflationary pressures are easing, easing at a faster pace. And the Fed just sees that these higher rates are not necessary. If you have an economy that is not bursting at the seams and climbing higher, causing more inflation, but is slowing nicely, quote unquote, slowing without uniting inflation, that is the scenario that right now the market is operating under. So I wanted to point that out, but the PCE is going to be extremely important.

Quincy Krosby (10:59):

We will also this week have new home sales. This is important. We see that folks are going in and new home sales, remember if you're going to go to the builders are actually have their own mortgage rates. So if the mortgage rates are coming down just a bit, their mortgage rates would come down more. And that's why they've been doing fairly well because folks get a better rate and they get a new home. So we're going to have the new home sales. And by the way, we had the housing market numbers last week. The permits were up and we always look for that. I mean, there would come some disappointments in those numbers last week, but permits numbers were up. And that obviously is important. Also, this week what we're going to see is obviously the earnings reports, and that is important. And in terms of earnings, we will have Netflix and the market is always focused on Netflix.

Quincy Krosby (11:50):

It's always seen as the first of the techie names that come out, and so we're going to hear from Netflix. We'll also hear from Tesla. That's going to be very important because Tesla has come under pressure, they're cutting their prices, we want to hear what they have to say. And then G.E., General Electric, undergoing restructuring. And there's a tremendous interest in G.E. in the marketplace and also Johnson and Johnson, and Proctor and Gamble, this is old world names, and American Express. And American Express I'm going to be paying especially close attention to because it gives also a picture of business spending. And in a market that is worried about this real strength of the economy, you want to hear are businesses worried? Are they telling folks don't travel as much or cut spending wherever you can? We'll hear it from American Express and also from American Express we'll hear how higher wage earners that typically have the Amex card, how they're spending, because that, you know, we know that lower wage earners are having a more difficult time.

Quincy Krosby (12:54):

We want to see the other wage earners, the higher wage earners, how they're faring in this market. So all of this is going to be extremely important. The earning season overall, it hasn't been stellar by any means. Has it been horrible? No, but not as strong as we would like. And so this week as we pick up the earnings reports we want to see strength come back in and guidance come back in at a more favorable rate. So don't by, no means am I saying that the earnings have been terrible, no, absolutely not, but not as strong as we initially projected. And so now the big earning season is coming in and we're going to hear from a broader swath of companies, and we want to hear what they have to say. And again, particularly about what they're saying about prices. Are prices climbing higher?

Quincy Krosby (13:46):

Are they finding that prices are climbing higher? Because if we're seeing it in those manufacturing reports, we want to know if it's wider, a wider move. It's something the Fed obviously doesn't want to see. And in closing, in good news, and again, this is very good news for the Fed, it is good news for the market, good news for the economy, and in the reports regarding how consumers see inflation down the road a year from now, three years from now, five years from now, those expectations are down. And that's what you want to see. Because if you have an environment in which all of us see inflation, just picking up and picking up and picking up, this psychology is this; buy it today because tomorrow it's just going to be more expensive. You don't want that. And certainly the Fed doesn't want that. And no central bank around the world wants that. So what we say is that, that inflationary expectations are well-anchored, and that's a major plus, especially for a market that wants to see the Fed beginning to cut rates. That's one thing that is going to have to be there intact with a big check mark and that right now we could say the Fed actually has that. And it's good news for our economy. Have a great week. We'll be back next week. Thanks so much.

New Speaker (15:00):

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Quincy Krosby (15:59):

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