Key Week for Data with Friday's Payroll Report in Focus

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, June 3. This is before the market opens. It looks like we'll have a strong opening, but everyone knows by the end of the day it could be a different picture for the market. And just as we saw on Friday, just to go over that very quickly, what we had was the market was down on Friday. The Russell 2000, however, was up and suddenly there was a big change in the market. And that change, people asked what happened? How could that be? Well, remember, it was the end of the month. You do have markets, portfolio managers that will buy. They'll sell not as much as what we have at the end of the quarter. Not as much as, of course, as we have at the end of the year.

Quincy Krosby:

But nonetheless, that still does go on. Nonetheless. Nonetheless, I want to point something out that when we then go to the new month, and we're still in that quarter. We haven't gone to a new quarter. The bias tends to be positive, but nonetheless, we know that this market goes from oversold to overbought, overbought, oversold goes back and forth when we have these very sharp moves. This week is a very important week for data. I'll get to that in a second because last week it was about inflation. It was about the personal consumption expenditures index. That's the Fed's preferred measure for inflation, the PCE. Without going over it, you know, item by item, the one thing that we saw, and that was important, even at the margin, meaning even just a little bit, we saw that inflation beginning to start moving again. Coming down. Moving down a little bit. That was important for the market.

Quincy Krosby:

It was extremely important because it indicated above all else, we could analyze it back and forth, but that the stalling that we saw, which worried the Fed, which worried the market suddenly, despite still some stickiness, but it started to move again, albeit very slowly, albeit not as fast as the Fed would like moving towards that 2% target, but it started to move again. So the market basically was pleased with that, and certainly the Fed has to be pleased with that, but obviously they want it to move at a faster pace and start coming down again toward their 2% target. Let me stress in this call, the Fed is not waiting for inflation to come down to 2% before they decide that they can cut rates. Absolutely not. They just want to make certain that disinflation continues. The path for disinflation, the trajectory, continues. So that was actually good news.

Quincy Krosby:

What you had also last week was Salesforce disappointed. We all know. I won't go into that story, but that really caught the market's attention very much so. And you know, again, it's a market that has been swinging from overbought to oversold very, very quickly. And those terms that I used, overbought and oversold, those are technical metrics that we use to describe the tone of the market. This week is important as well. And it's important because we're going to hear from Dollar Tree. And so that's going to be important. We want to hear, we want to hear about the consumer because, you know, we are looking at data from last week showing that the economy slowing, consumer spending slowing. And when the consumer represents about 68 to 69% of this economy, you want to see... Are they stopping? Is it game over? Because we still have a labor market that it remains resilient, and we'll have more on that for Friday to find out exactly at least what the official data suggests about the labor market.

Quincy Krosby:

And Dollar Tree gives us another snapshot for the consumer. Also, last week we had Costco come out, and I thought this was interesting. You saw their numbers. You saw how the market rewarded their guidance, rewarded the company. But they made an interesting comment. They said, yeah. We're seeing customers come in, they're looking for buy, but they added something. They said, we're seeing, you know, customers coming in and seeing just a little bit of discretionary items that they're buying. They didn't go wild over it, but they mentioned it and I thought that was important. In addition to that, what we are seeing across the board now, everyone from McDonald's to Target to Walgreens to Walmart, cutting prices, cutting prices. They're going in and they're making these big splashy headlines. We're cutting prices. Obviously they're going to see how consumers react to that and whether they come in and spend more.

Quincy Krosby:

When we look at the market itself, obviously consumer discretionary has been down. But it hasn't actually shown up except by, you know, stock specifics that consumer staples are just moving higher and higher and higher. We're not seeing that. But what we are seeing is a consumer that is careful. A consumer that is discerning. I used that word, be discerning. We're being careful about what we spend. We'll have another test about the consumer, by the way. And everybody listening somehow I think understands this and that is back to school spending. And back to school spending is going to pick up as we get deeper into the month of June, the, there are going to be all kinds of buys to get consumers to come in and spend a bit more money on upgrades and, you know, devices, upgrades and so on, where the margins are better for the retailers.

Quincy Krosby:

But nonetheless, back to school sales are an important harbinger of how the consumer is going to spend for the holiday season and included in this holiday season, increasingly in the U.S., then after back to school sales, then yes, it is. It's Halloween, and then it is the big holiday season as we get toward the end of the year. But that also gives us a barometer of health of the consumer. So we're going to be paying close attention to that. This week, what we have is extremely important data for the market for view of inflation. And it's going to start today on Monday when we get the ISM, this is the Institute for Supply Management, the purchasing manager reports of manufacturing. And speaking of manufacturing, last week it was really interesting, the Richmond Fed for manufacturing actually turned positive, albeit slightly, but that was important because we've seen some of the manufacturing reports come in still in the doldrums, but we'll pay attention to that ISM manufacturing report.

Quincy Krosby:

The expectations are still down, by the way. Just below 50. 50, remember is the line in the sand. Above 50 is expansion. Below is contraction. What are we looking for? Prices paid. This is becoming incredibly important for the Fed and for the market. In addition to the ISM manufacturing report today, we are going to have another flash report. That means it's a quick report. It's not the final report. And this comes from the S&P 500 reports that they report on manufacturing and the service sector. That comes out early this morning on Monday. This will be for manufacturing and they see it, by the way, for the month of May, above 50. Just above 50. But again, we're going to look to see what they have to say about prices paid. Also, today, Monday, we're going to have construction spending. Expectations are, by the way, that it actually moves into positive territory.

Quincy Krosby:

We'll also have auto sales. Auto sales, believe it or not, despite the higher interest rates for those loans that you get have actually held up. But we're going to see whether or not it continues to hold up as we see consumers holding back in their spending. And then we're going to have factory orders on Tuesday. That's tomorrow. Expectations are that, that actually has pulled back a tad. And remember, these numbers are fluid as we know. They surprise to the upside. They surprise to the downside. There'll also be a report on job openings, and I want to make this very clear. There's confusion about that report that comes out from the government because the question is, wait a minute. Are they taking job openings down when they're filled? How come they've got multiple job openings at different companies that look at the jobs? So there's questions about the validity of that report.

Quincy Krosby:

Nonetheless, we will also look at labor turnover in the report because we want to see are people jumping out of their jobs for new jobs. And the reason they do that is typically, typically for higher wages. And remember why higher wages makes everyone nervous. Because when you get higher wages, that tends to be inflationary. So let's keep that in mind. But right now the expectations are that job openings will still remain solid, but just down at the margin. Now I want to talk about Wednesday because this is where we get the ADP employment report. And interestingly, it has actually, remember this is only the private sector. Only The private sector. Has nothing to do with government jobs, state governments or the federal government jobs. It's actually been showing a clearer, clearer picture that's actually holding up. They used to have problems with the ADP employment report.

Quincy Krosby:

They reconfigured their formula and it is actually looking a bit better in terms of validity. And so we've always said about it... Well, it doesn't have a direct positive correlation with the Friday's number that we're going to get, the payroll number. But you know what, more and more you're seeing a look at it that actually, at least in terms of the overall trajectory of the jobs, is becoming increasingly clearer for the Friday number. So, we'll see. But right now the expectations there that are for May, we saw the number come in at 179,000 new jobs. That's the consensus estimates. We'll also look for which jobs, which sectors have been hiring. And as I said, you're hearing more people in the industry, by the way, economists saying... Well, you know, maybe they've reached a formula now for their reporting that has more clarity for the Friday number for the government.

Quincy Krosby:

Also on Wednesday, the ISM, Institute for Supply Management, the purchasing manager index. These are important reports. This will be for the service sector, which as everyone knows is the largest part of our economy. Expectations are that it has moved into positive territory. Just over that 50 line in the sand for expansion. Again, this is what we're going to be looking for just as we do in the manufacturing report that we'll see just in couple of hours after I do this call. And that is we're going to look for new hiring expectations. We're going to look for new orders and we're going to look for, yes, the prices paid. We are in a market that is very sensitive to prices paid. A market that is focused on how the Fed interprets all of this data. That's what we have. And so this is why, you know, we really go under the hood for all of these reports.

Quincy Krosby:

And then obviously on Thursday, as we do, we're looking for the initial jobless claims. They tend to be an early warning sign of the larger labor market. For obvious reasons. Expectations are, by the way, that we may see that number come down to about 216,000 new jobless claims. Also, continuing claims. And this has been picking up a bit. Not dramatically, but the reason it is so important is what it indicates is that... Hey, are people getting new jobs? Are they finding new jobs quickly? The more that that number picks up of continuing claims, the more it suggests very logically that people aren't finding new jobs as quickly as they did earlier in this year and even last year. So this is going to be important. And Friday. Here we go... This is going to be, yes. The U.S. government's report. Expectations here at new jobs coming in will be 178,000 new jobs.

Quincy Krosby:

This is compared with what we had last report, which is 175,000 new jobs. Not dramatically higher, but still holding in there. And that the unemployment rate stays at about 3.9%. What we're going to be focused on is this; we're going to be focused on hourly wages. There is an expectation that perhaps that moved higher, but not dramatically so. And I go over this each and every time we have these numbers once a month. And the reason it's important is that the more the wages climb higher, the more it feeds into consumers willing to spend more, you know, with the higher prices. So that's why it feeds into inflation. We'll see if it actually does in reality when the numbers come out. But nonetheless, right now the expectations are that it moves up just a tad. Just a little bit. The other thing that we're going to look for in it is the hours worked.

Quincy Krosby:

This is extremely important. Hours work per week. The reason is the more hours that employees work tells you that there's more economic activity. And we're going to be looking at what kinds of jobs were created and which sectors. We know education starts to pick up about now as people go back into the system. We are going to be looking to see if we see the private sector picking up and what kinds of jobs in the private sector. So all of this will give us a picture of the strength of the labor market because that feeds directly into, by the way, how consumer spending is viewed. Because if the labor market holds up, consumer spending tends to hold up. And let me mention that from last week what we had was interesting. We had the consumer confidence report coming out from the conference board, which isn't a very important survey. It's widely followed. But actually that improved just a little bit.

Quincy Krosby:

It's still the trajectory is down, but it has picked up just a tad. And one of the components in that survey was that folks were saying... Well, you know, the business conditions are actually, you know, picking up. The job market, picking up, and remember this is just small, picking up a bit. That's important because again, it affects the consumer's view of whether or not you know... Well, you know, if I lose my job or my, do you think I'm going to be able to get another job? So that consumer confidence report still down, but picking up just a little bit so that was good. Also, on Friday we had the University of Michigan's survey of confidence and inflation expectations. The confidence was down. But I do want to point out that in terms of inflation expectations over the next one year and three year, looking at even more, actually held steady. It came down. It held steady. Gasoline prices have a role in this.

Quincy Krosby:

I've mentioned it so many times. If gasoline prices keep rising and you know, consumers, even if you don't drive a car, you're just sitting there as a passenger, you'll notice it. Your expectations for inflation will rise. Actually, it held lower right now as I do this call, oil prices are down a bit. This, despite the fact that OPEC, OPEC Plus, had a meeting. It was a remote meeting on Sunday, and they continued production cuts into 2025. Why? Yeah, the reason is they want prices to climb higher. Right now we're seeing prices down despite that. So this is important because we know that consumers will hold back spending when prices climb higher, particularly when they have to go and fill up at the pump. So there's a lot for this market to absorb this week, but overall it is going to be one.

Quincy Krosby:

Do we see the prices paid component both in the flash S&P Global services PMI that's coming out Monday morning. That's this morning. And do we see it in the Institute for Supply Management, ISM, reports coming out both in manufacturing and the service sector this week. Do those prices paid go up or do they go down or they level off? With a market that and a Fed that is so focused on that trajectory of inflation, these numbers are going to be important. And then, of course, the Friday number for payroll. This is extremely important because the market sits here and says... Well, okay. How much is this economy going to slow down? And obviously a major component of it is, yes, consumer spending, which also is very much based on the ability to work. The ability to have jobs. How plentiful are those jobs? So it's an important week for the market and the Fed in the blackout period before their June meeting coming in.

Quincy Krosby:

Those of you who follow emerging markets, let me report this. Mexico right now as I look at that, the numbers are down and why? A resounding victory for their first woman president, but who comes from a party that enjoyed success. But the market, the market itself is worried. If you look at the peso, it's down. It's worried that this will be a continuation of state policy taking over as opposed to the the market itself. So keep your eye on on that. And then in India, which has been a favorite market for emerging markets, the Modi, Prime Minister Modi, winning. Well, by the way, they're still tallying it. Tuesday we'll get the final tally, but expected to get his third term. And the expectations are it will be a decisive victory. Meaning a strong victory. Again, we're waiting for that final tally, but the market is up.

Quincy Krosby:

And the reason for that is the market does believe that he's going to have a decisive, strong victory. Meaning that the lower house in parliament will also get the seats that his party wants. It's a coalition led by his party and that the continuation of economic policy that is pro-business will continue. Remember something about Modi. He came in and this would be his third five-year term with a very pro-growth policy agenda. And so again, the market is saying that they believe that he's going to have that decisive victory, strong victory with parliament, the lower house of Parliament, underpinning his policies. So I just wanted to mention that because these are the two very important emerging markets. Also this week, I just want to point out the European Central Bank is meeting. Expectations are that despite the fact that there have been a couple of upward moves in inflation, that they are still expected to actually cut rates at this meeting. We'll see if that actually transpires. And we also have Bank of Canada poised to potentially cut rates. So a lot going on this week. Take care. We'll be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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