Where the Market is Focused: This Week It's Inflation and Q1 Earnings

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's Monday, April 8. Thank you for joining me. Last week. It was about the payroll. Payroll report was crucial, especially the component regarding wage growth. Nonetheless, it was a week in which the market was completely focused on inflation and the ramifications of that payroll report on inflation. The good news is though, the headline number, just over 300,000 new jobs, really surprising the market, it showed and underscored that this economy remains resilient, and that is good news overall for the market. However, when we also looked at the unemployment rate inching a bit lower that suggests again that this payroll number represents an economy that is solid, is resilient still. And remember, we talked about this in last week's call, and that was about wage growth.

Quincy Krosby:

You don't want to see wages climbing higher on an hourly basis month after month because that suggests that companies are going to try to pass that cost along to the end buyer, the end consumer, whether it's businesses or retail consumers, and that helps push up inflation. In addition to that, when wage growth is higher, we, the consumer, representing nearly 70% of the economy. We tend to spend more. We feel better about the economy, better about how much money we have. So again, the good news is that actually wages did decrease a bit. The headline wages did decrease a bit. This week, it is about inflation. And why is that? Because we are going to have the CPI report. This is the Consumer Price Index. This is what we call the CPI report, and it is based on consumer surveys. It is indicating right now, as I do this call on Monday morning, that we will probably see the year over year headline report a bit higher than the last report, just a little bit.

Quincy Krosby:

However, remember something, the market is looking at the core, the core CPI report year over year. You'll hear them talk about this when these numbers are released. Expectations are that it will come down just a tad and that would be good news for the market. Let's keep in mind something in general about inflation. As the year began 2024, the expectations were that there would be six rate cuts this year. Now the expectations are perhaps maybe three, but maybe it'll just be two, as the Fed is edging closer to a narrative of staying higher for a bit longer. And the reason is quite simple. The underpinning for the economy remains resilient. Even though economic growth, GDP growth, has slowed to below 3%, it's still coming in for the first quarter at just below 3%. It is with the data still coming in and being recalibrated, but it's still showing growth and maybe not stellar, but certainly very solid.

Quincy Krosby:

The concern for the market is is the Fed actually going to hold back rate cut for June? Right now it's about 50-50 and you're hearing more speakers, Fed speakers challenging the narrative of coming in; even the summer, maybe July, maybe in the fall. And so this is something where the market is trying to adjust to the possibility that the Fed gives fewer rate cuts this year. Nonetheless, this week, we will have more data, and the core CPI is going to be very important in terms of the Fed's ability to have those data releases that they need to confirm and to offer confirmation that inflation is moving at a faster clip downward, that the trajectory remains on track, and that it is not stalling because that's the concern that inflation may be actually starting an upward spiral. The market is, and the Fed will not stand for that.

Quincy Krosby:

Also this week, I do want to point out that besides the CPI report, which is extremely important for the market, it will also be the Producer Price Index. That's the PPI. That is the, in essence, the tunnel if you will. When I look at it, I always see a tunnel of the prices, paid components that companies have to pay before they actually come out at the end of the tunnel, and tell us whether or not they had to pay more for the production cost. This is coming out actually the same day as the CPI is coming out, and that's Thursday, April 11. So keep in mind, it's going to be extremely important at 8:30 in the morning, Eastern on Thursday, April 11. The expectations are, by the way, and consensus we always talk about consensus estimates right now are that that number will come in lower than expectations.

Quincy Krosby:

That's good news because what we're seeing is commodity prices are climbing higher and they're climbing higher, the industrial commodities, they're climbing higher despite the fact that they are priced in U.S. dollars and that the U.S. dollar is stronger against other currencies. This is important because what happens is it's telling, sending a message, and the message is, hey, we need these commodities. You know, China, the world's second largest economy, and the U.S. the world's largest economy, actually is seeing manufacturing bottom and actually moving into expansion territory, and therefore commodity prices are moving higher, even with a stronger U.S. dollar. One of the things that we talked about, this is going back over a year ago, is that if China actually started to gain strength in its manufacturing sector, which is large in China, we would see commodity prices move much higher and that could inflate global inflation.

Quincy Krosby:

Well, now we are seeing it, if the data are to be believed in China, and we're going to go with that assumption until proven right or wrong, and this is spurring and underscoring inflation climbing higher and with the U.S. inflation climbing higher. So we will see if it shows up in the Producer Price Index, the PPI, coming out on Thursday morning. Perhaps, perhaps it will not yet be reflected in last month's report because we are just seeing these prices move higher this month as these data releases are indicating the beginning of strength in manufacturing, both in the U.S. and in China. But nonetheless, the market is paying very close attention. In terms of all prices, remember, China is the world's second largest economy. They are the world's largest importer of oil, and the expectations are that that will continue and actually pick up if their economic backdrop is stronger as opposed to the the slow, slow start that they've had since the end of those covid, really restrictive measures.

Quincy Krosby:

It's going to be in a very important week. We will still have Fed-speak this week. We are also going to have the minutes from the last meeting at the Fed. And you know, the market goes through that and tries to extrapolate from that. Even though we've had a onslaught of fed speakers last week and this week, we kind of know what their thinking is. And by the way, that thinking is, you know what? We need to see more data, a lot more data before we make a determination to begin cutting rates. We're also going to get the National Federation of Independent Business Optimism Index, that that'll be tomorrow. That is the small business owner, the backbone of our economy, and of hiring. We're going to hear are they more optimistic about inflation? Are they more optimistic about their own sales growth?

Quincy Krosby:

Because that's key for small business owners. Much depends on how they're hiring, but they will always look to see if sales estimates are moving higher because that's how they hire. Expectations are, by the way, that that could actually inch up just a tad in terms of optimism. The other thing that we're paying attention to this week in addition to everything else will be consumer sentiment on Friday. And the reason I'm mentioning the Consumer Sentiment Report, this will be their preliminary report before we see the final report. And this has to do with our consumers beginning to see inflation inch higher because of higher gasoline prices. That always is a positive correlation. And the reason is quite simple and yet it surprises everyone, is that when people are driving, that's all they see; filling station after filling station, what the price of diesel is, what the price of gasoline is, and they watch and see whether or not it is climbing higher. Expectations right now is that it's not going to show up in this report, but we are keeping our eye on it because it is extremely important for the Federal Reserve. When you start to see that Americans see inflation climbing higher over a one year, two year, three year period it starts to set in a psychology of higher inflation, which is difficult to adjust to if it doesn't start coming down. And so we've seen gasoline prices climbing higher. Now, I do want to add this morning that gasoline prices, all prices in general are pulling back, on the back of a potential ceasefire in the Middle East. We don't know, when we say potential ceasefire, as everyone knows, that could change rapidly, but that is the expectation right now. Does oil have other catalysts?

Quincy Krosby:

Certainly, yes. When is seasonality? We go into the driving season in the U.S., demand picks up. And also in terms of supply, expectations are that if the economy remains on solid footing and the global economy, that all supplies actually will be lower than expectations, and that actually helps underpin higher oil prices. So there are a number of catalysts. It's not just about about the Middle East. So in any event, there's an awful lot of important data this week. And last but not least, with the beginning of the earning season on Friday with the big banks. And why are they important for us? Because what we're going to hear from them is what about loans? Tell us about loans, whether it is retail loans, corporate loans, are you seeing more of it? Are we seeing delinquencies picking up.

Quincy Krosby:

And their expectations of economic growth in the us? Friday will be the beginning of the first quarter earning seasons. Remember, we always look back and it's going to be an interesting day because we have tremendous amount of Fed-speak this week. We have important inflation numbers, but we are going to begin with the banks and always, always there is important expectations for what they have to say, but also their economic predictions and forecast will come out. So very important week, last week, payroll, this week, inflation and the beginning of the earning season. Take care. We'll be back next week. Thanks so much.

Speaker 2:

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Speaker 2:

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