Raft of Economic Data and Earnings but PCE is Key

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 Monday morning, February 26, and this is the Talking Point. Thanks so much for joining me. This morning, as I look at the market open, it looks as if it may have a bit of a struggle in the morning, but as we know in a market where the earnings are still coming in, particularly from the retail side, retail Macy's, retail Dominoes, just to give you an example. Best Buy, I could go on and on. We also have still some more important tech names. Salesforce, for example. So the market is still not finished with earnings, but remember we had the big one. The big one came out last week, and obviously that was Nvidia with a striking, striking top-line, bottom line and guidance. And what it suggested was that they are absolutely the go-to for infrastructure, Artificial Intelligence infrastructure.

Quincy Krosby:

And as the CEO said, AI is at the tipping point, meaning more and more to come. Now, clearly, clearly that helped the market. There was no doubt about it because there were concerns that they may have a very good report, good guidance, but it wouldn't be enough to satisfy a voracious market that wanted more and more. But clearly it worked. Now, this week, again, we will go into all of these retail-related names. This morning for example, we had Domino's, and what I focused on, I wanted to hear what they had to say about prices. And you know, they said prices have come down. Obviously the food prices. That's important for a company like Domino's. So all of this is important as we try to assess this week where inflation was and perhaps where the market thinks it's headed. What we know is this. The Personal Consumption Expenditures Index, that's the PCE.

Quincy Krosby:

The information for that index comes from businesses as opposed to the Consumer Price Index, the CPI, which comes from surveys based on what consumers have to say. What we're looking for above all else is where is that core and super core? Is it a 2.9? Is it coming down or is it climbing higher? Why is this so important? It's important because this market, as everyone knows, was hoping and basing its expectations on a host of cuts, interest rate cuts from the Federal Reserve. The Fed has pushed back on that. And let's just face it, the CPI report, when it came out showed acceleration of prices. And we also saw, and we will see again this week at the end of the week, that when we hear from the manufacturing indexes, Philadelphia Fed, for example, the Empire Fed, we see that prices have climbed higher. The Producer Price Index, by the way that came out after the CPI indicated that prices paid, prices received higher.

Quincy Krosby:

So the market is concerned that the Fed may not feel comfortable enough to cut rates until perhaps June, because when we pay attention to the Fed funds futures market on probability of easing, now it looks as if June. It looks as if May may not be in play, but things could change based on this week. If the PCE, Personal Consumptions Expenditures Index, comes in cooler than expected, perhaps we see a recalibration of what the market says that the Fed may do. Keep in mind, all of the Fedspeak that we have heard and looked at doesn't say there will not be a rate cut this year. No. They just say, you know, we have to wait before we can declare victory on inflation. But they didn't come out and say, no rate cut this year, because that would be really hard for the market to digest.

Quincy Krosby:

They have just said we want to be careful before we initiate interest rate cuts. And so again, Thursday morning, you'll hear from the Personal Consumption Expenditures Index. This is extremely important for the market and the consensus, however, is that it will be higher than what the market wants. So this is going to be an important data release. And then, by the way, on Thursday afternoon, we will have more Fedspeakers. And then on Friday, a full roster of Fedspeakers. I mention this because the Fedspeakers have by and large spoken in unison. They have had an orchestrated message for the market, and that is, we are not yet ready to declare a victory. We are going to be careful, but no one has come out and said, no, you know, no rate hikes, rate cuts this year. We haven't heard that at all. So we're paying attention to all of the data.

Quincy Krosby:

I also want to add one thing in terms of prices, acceleration of prices, or deceleration of prices. On Friday, the Institute for Supply Management, that is the ISM, Purchasing Managers Index, the ones that we pay very close attention to. We pay attention to the service side and we pay attention to the manufacturing side. They're coming out with their report on Friday, and we're going to pay attention to whether or not prices have receded or have prices climbed higher. What we pay attention to is prices received and prices paid. So let's pay attention to that because the market, the treasury market, will be paying attention to that very, very closely, as will the equity market. In addition to all of this, we're going to have the durable goods numbers this week and, remember what we look for, the component within that, that has to do with corporate spending, capital expenditures.

Quincy Krosby:

So we'll pay attention to whether or not companies are feeling more comfortable to increase their capital expenditures. Also, we are following always the labor market and so far, despite the headlines regarding more layoffs in technology, more layoffs in financial services, the initial unemployment claims reports that we are seeing and continuing claims reports remain healthy. And you know, we pay attention because if we look at one number in terms of the labor market, that gives us an indication of struggles within the labor market before the actual payroll report comes out. It is initial unemployment claims. So they are still suggesting that this labor market remains solid and resilient. Why is that important? Because consumer spending represents, as I always say, about 68% of our GDP, and much of that is based on the labor market. Do I have a job? Does my family have a job?

Quincy Krosby:

And so on. It's logical. Also, I do want to point out that this week we will have some reports coming from the housing market, but I would have to add it's Thursday morning, that PCE report. The market again is hoping that it comes in cooler than expectations and that in essence, it refutes what we heard from the Consumer Price Index and the Producer Price Index. That's really what the market is hoping for. But again, we'll keep our eye on the reaction from the two-year Treasury yield, which is the one most closely associated with actual monetary policy, and also the tenure year where the mortgages, the loans are based on that. It's going to be an important morning and it's going to be very important for the overall tone of the market as we go into March, by the way, which tends to be difficult in terms of seasonality.

Quincy Krosby:

February is and March is as well, but in an election year, it is particularly historically, in terms of historical patterns, a difficult month. Markets don't like uncertainty. You know, we have issues on the debt and so many other things, but also in terms of the actual politics involved, that the market becomes, again, more sensitive. That's just the historical pattern but normally those patterns in terms of seasonality do actually present themselves again, as I said, particularly in an election year. Overall, the earnings have been good, the revenue has been picking up, and the question will be whether or not this week of retailers coming in and telling us how are people spending their money. It's going to be important. Now, one thing we do know is that we as Americans have been spending more money on services. You could look at the receipts from many of the restaurants, the bars, they're actually holding up, but this week it'll be more on actual stores. It'll be, you know, whether or not we're online more than we are actually going into the malls and the brick-and-mortar. It's going to be an interesting week for the market. But again, Thursday morning, 8:30am Eastern, that's the one to watch. Have a very good week. We'll be back next week. Thank you again.

Speaker 2:

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Speaker 2:

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