Payroll Report and Fed Speakers Are the Key for Markets

Quincy Krosby:

Hello from LPL Financial. Welcome to The Talking Point. I'm your host, Quincy Krosby.

Quincy Krosby:

Good morning everyone. This is Quincy Krosby. It's The Talking Point. This is Monday morning, April 1. Thank you for joining me. Last week we had on Friday, when the market was closed, the Personal Consumption Expenditure Index. This is the Fed's preferred report on inflation, and it comes from businesses as opposed to the Consumer Price Index, the CPI, which is made up of consumer surveys. A lot of folks ask, do they differ dramatically? Well, sometimes they do, but overall, the general trend is they kind of come out in the same line in terms of where inflation is headed. This report that came out was within consensus estimates. That's probably why this morning, the market so far is in the green. However, what we did see was that month-over-month, the inflation report, the PCE, was a bit cooler, just a tiny little bit cooler, but year over year, just a little tiny smidgen of it hotter.

Quincy Krosby:

Yet it was within consensus estimates. And when that happens, the market is not, you know, consumed by, you know, which one was correct, which one was wrong. It came in in a range that the market had basically forecast. So that was good news. However, I do want to report that Christopher Waller, who is a highly regarded, what we would call a pragmatic hawk on the Fed's board, made a comment when the market had, after the close, when the market had made new highs, the Dow made a new high, and the S&P 500 made a new high last week. And he made the comment, look, we're not in any rush right now to cut rates. We have to just basically wait and see. I need to see a bit more than just one month of data showing a cooling in inflation before I can agree to cutting rates.

Quincy Krosby:

This is important because he is seen as someone who, again, is pragmatic, even though he comes from the hawkish side. And I do want to make it clear that he actually, a number of months ago, was one of the first in the Fed speakers to come out and say, yeah, you know, I see the data actually getting better in terms of inflation and I could see a rate cut in 2024. Well, that really grabbed the market's attention. You may not remember that, but it really did coming from him. And then of course you had the dot plot coming out with a couple of people saying, well, yeah, we see a rate cut. But his comments, particularly because he tends to come from the Hawkish side, made a very important impression on the market. And then he just came out and said, well, no, not yet. Not yet.

Quincy Krosby:

We got to, we got to wait. I got to see more evidence. Very important. And then Chairman Powell on Friday, speaking at a conference in San Francisco from the San Francisco Fed, basically said the same. They were in no rush. We're in no rush. Now still, and I want this out still, the probability for a rate cut in June at the June Federal Reserve meeting actually remains in fairly positive territory in that it is just over 60% probability. However, it has pulled back. And I do think that this week's data will be important for whether or not that probability increases or does it pull back even more. This week, there is a host of Fed speakers coming out all week long and they are going to have commentary again about inflation, about where they see rate cuts coming. And that is going to be important for the probability of a rate cut coming in June, at the June Fed meeting.

Quincy Krosby:

However, the data this week will be most important. And so let's go over that because we are looking at a week of important data and it will begin today, and this is on Monday, April 1. We're going to have construction spending. The estimates are that we finally go into positive territory coming from the earlier negative report. Now a lot of that could have been due to bad weather across the United States, but overall expectations are that when it comes out, it will be in positive territory. In addition to that, we are going to have the Institute for Supply Management manufacturing report for March. This is going to be incredibly important for us because we're seeing manufacturing across the country pulling back, not moving higher, but pulling back. The estimates are, however, that we may tick up below 50, which by the way, as you know, 50 is the line in the sand.

Quincy Krosby:

Above 50 is expansion, below is contraction. However, the consensus is that we will be a little bit better than we were the last month and that it's still negative territory, but perhaps it is bottoming. It's going to be important. But before we even get to that, there will be a report from the S&P Global U.S. Manufacturing Purchasing Manager Index for March. And that shows manufacturing actually above 50. Folks always ask, well, which one is the most important most on Wall Street? Look at the ISM, Institute for Supply and Manufacturing, particularly when there are divergences. And certainly if you have one report showing, hey, it is an expansion territory versus still in deceleration, you may want to go with the one that you like better. But normally you would have to say that the general consensus follows the ISM, Institute for Supply Management, as opposed to this morning's standard import global U.S. manufacturing report.

Quincy Krosby:

Also on Tuesday, we are going to have factory orders. And this is also crucial because we were in negative territory. Expectations are, it ticks up, not dramatically, but just enough to say it is now in positive territory. This is going to be important for the entire view of where we are in terms of manufacturing in this country. Job openings comes out as well. And I do want to mention, this is is important because for the Fed, they prefer to find a balance in the labor market by showing that job openings recede. And the reason for that is quite simple. The more that folks believe that there aren't that many job openings out there, they'll stay where they are and they're not going to jump. And the reason they tend to jump is that they're going to make more money. So the Fed prefers to see that decline and the expectations are that it will decline to about 8.8 million job openings.

Quincy Krosby:

However, there is recognition that that report, the job opening and labor turnover report, actually unfortunately is not a very clear survey. That these job openings stay online too long or they get cut too much, that it just doesn't reflect the actual job opening national trend. So, but nonetheless, the market does pay attention to that. And again, we will hear from many Fed speakers today and tomorrow. I am paying attention very closely to what the Cleveland Fed president has to say, Loretta Mester. She tends to be conservative. She tends to be hawkish, but she has been one who has said, I see the possibility of a rate cut this year. Yes, I do, as long as the data underpins that. And by that, she means exactly what we've heard from Chairman Powell, what we heard from Christopher Waller, who tends to be on the same side of the ledger as Loretta Mester.

Quincy Krosby:

And that is we need to see more data. We need to be assured that when we cut, we are not opening the floodgates for more inflation to come in. We'll also have auto sales this week. I see the reports coming out of February suggesting that Americans have actually been buying more vehicles. We'll see if it has held up in March. The ADP employment report comes out, and that has been restructured in terms of how they report. And there are many economists who look to that, the ADP report, while it doesn't necessarily have a strong positive correlation with the Friday employment report, which is what everyone, you know, sort of holds their breath, and okay, where is that? The ADP employment report as it has been reconfigured is widely followed because the revisions that were so emblematic of that report over the years has eased without egregious revisions.

Quincy Krosby:

But it does follow the private sector. It absolutely does follow the private sector. The expectations are that it will come in about 160,000 new jobs. This is above where it came in before last month to 140,000 new jobs. Again, it's going to be important. It doesn't mean that that is where the Friday payroll number comes in, but it does help set a trend. But again, it's in the private sector completely. Again, more Fed speakers, including Chairman Powell on Wednesday. We will get the ISM services. This is an important report because this is the majority, the basis of our economy is the service sector. Expectations are, it remains above 50, but what we're looking for in both reports is the following. One, new orders. We are looking at expectations for hiring, which is incredibly important, especially with manufacturing, which has lost thousands and thousands of jobs.

Quincy Krosby:

And please keep in mind for both reports, manufacturing and the service sector, we are focused on prices received and prices paid. Very important because of the focus on inflation, and that in previous reports, we have seen those numbers tick higher. We want it to tick lower. And again, more and more Fed speak, especially Chairman Powell speaking on Wednesday. On Thursday, obviously we get the initial jobless claims, and that has actually come in cooler than expectations at about 210,000 new jobless claims. But I do want to add here that continuing claims has actually ticked up a bit. This is not in dramatic territory, but we watch to see any change whatsoever. And the reason that's important is this. That when continuing claims tick higher, it's suggesting that folks can't find new jobs right away. So let's keep that in mind. But the initial unemployment claim still healthy for the economy. On Thursday, we have a lot of Fed speak.

Quincy Krosby:

And then of course, Friday. Friday is the big day for the payroll report. Expectations are consensus estimate for March coming in at about 200,000 new jobs. This follows the surprise that we had last month for 275,000 new jobs. And the expectations are that the March unemployment rate comes down to 3.8%. Now, here's what's very important. It has to do with hourly wages. And that expectation is that it comes down, and this is very important because the Fed is focused on that. Because when hourly wages climb higher, what happens is that companies want to just pass along that cost. And at the other side of it is, if I have a higher wage, I tend to spend more. Consumer spending is very much based on the labor market, and therefore, that could also help fuel inflation to keep climbing higher. So again, on Friday, also followed by an awful lot of Fed speak.

Quincy Krosby:

So this week, Fed speak payroll report and the Institute for Supply Management manufacturing and also the service sector. Those will be taken apart, again, as will the payroll reports be taken apart. Where is the hiring coming from? What sectors are reflected in those reports? And also whether or not wages are climbing higher or are they drifting lower? And the consensus right now is in the Friday report that the hourly wages comes down a bit, which is what the market wants to see, so that it does not fuel consumer spending, nor does it fuel inflation via the consumer spending. And again, where companies take a deep breath and say, oh, this is good news, because we don't have to find a way to pay for the higher wages. So a very important week for the market, especially as the market continues to focus on rate cuts. Also keep your eye on the 10-year Treasury yield.

Quincy Krosby:

Right now, it's in a comfortable level, obviously with the market where it is. And last but not least, here's a bit of good news. We had an auction last week for the seven-year Treasury. It came in with buyers, particularly foreign buyers, coming in and buying quite a bit of it, which was extremely good news, even though we would like to see domestic buyers, stronger buyers. But nonetheless, the notes were placed. The take down was strong in terms of who was buying and what they were buying. They bought that seven-year Treasury note, and that was helpful for the market last week because even the 10-year Treasury yield came down after that auction closed. So that was good news for the market. Remember, we pay our bills and, oh boy, we have a lot of auctions coming up because our bills are very high in this country. Having the buyers come in and buy those notes is what is helping actually the overall market. So thank you very much. Have a very good week. We'll be back next week. Thank you.

Quincy Krosby:

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Quincy Krosby:

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