Shortened But Crucial Week for Markets with PCE Inflation Data

Quincy Krosby:

Hello from LPL Financial. Welcome to The Talking Point. I'm your host, Quincy Krosby. Good morning everyone. It's Quincy Krosby. This is The Talking Point. It's Monday morning, March 25. Thank you for joining me. Please keep in mind that on Friday, that's the day that we have that important information coming from the Personal Consumptions Expenditure index, the PCE. The market is actually going to be closed when that information comes out. So the market this week is filled with important data, even leading up to the PCE report, which obviously for a market that is so focused on when and by how much the Fed is going to cut rates this year, everything related to inflation is important. But one of the things that I picked up from last week in the Fed meeting is obviously the dot plot, suggesting that they would have three rate cuts this year, which the market of course enjoyed, and they cut back for next year, one rate cut.

Quincy Krosby:

But you know, that's a long time from now. Making those suggestions or projections of forecast is a little bit... They do it, but obviously it's subject to quite a bit of modification. But nonetheless, Chairman Powell was up on Capitol Hill and when he was speaking at the press conference, started to talk about his other mandate, the Fed's other mandate, which is to create an environment of sustainable economic growth, which is considered the jobs or the payroll, the labor market mandate. He talks about that a bit more, and he even included a comment that they could cut rates if the labor market starts to deteriorate. That's a scenario by the way, that the market is not looking forward to, because if you start to see deterioration in the labor market, you'll also see deterioration in consumer spending, which as we know is 70% of our economy.

Quincy Krosby:

So what the market is hoping for is what they call the, you know, the Goldilocks, if you will, the soft landing. And that scenario is still intact, by the way. It is that the Fed will cut rates because the economy cools a bit and that higher inflation pulls back. And also we don't need those higher for longer narrative underpinning the economy or the market. That's the narrative that is the scenario that the market wants. Also, one of the things about the labor market is when unemployment starts to pick up, it tends to move quickly. Historically, it moves quickly and the Fed, and he made it clear that, you know, we will move, policy will move accordingly. But that is not a scenario that the market is expecting now. Yes, the unemployment rate climbed higher, but when we pay attention to the initial unemployment claims, they still are very healthy, despite the headlines that we see every day about, you know companies cutting, cutting, cutting, cutting.

Quincy Krosby:

But nonetheless, I find it interesting that he started to inject that mandate. That is what we call the labor mandate, the payroll mandate, into his speeches in addition to just talking about inflation. So we will pay attention to next week when we have the payroll report, but this week it will be about the Fedspeak, it will be about new home sales, but it'll also be about durable goods orders. And that is important because embedded in the durable goods orders is an area that gives us a picture of capital expenditures and we want to see whether or not companies are spending more money on infrastructure spending, for example, any kind of capital expenditures because it tends to underscore whether or not companies overall are optimistic about the future and that they're prepared to spend and it's capital expenditures. So we'll pay attention to that.

Quincy Krosby:

That'll come out on Tuesday. Also, this week there's a bit of continued data releases about the real estate market, and today, on Monday, we'll have new home sales. The expectations are that they will have climbed higher. Then as well, we're going to have the Case-Shiller home price index, and that is going to be interesting to see whether or not home prices continue to climb higher. You know, this is a regional issue. We tend to see the higher prices, not across the country, but individual regions. And it has been surprising because there's one region in the south that has typically had the higher prices, but now we actually saw that slow down just a bit and other regions picking up. The other thing that we're going to be paying attention to on Thursday, of course, we're going to look at the initial jobless claims because that is one of the first signs of a deterioration or, or the opposite; strength in the labor market.

Quincy Krosby:

Expectations are that we will see initial unemployment claims pick up just a bit. There will also be the GDP revision, the second revision for the fourth quarter, that is last year, the end of last year. And the consensus estimates right now is that it remains the same 3.2%. I'm looking ahead and I'm looking at the quarter now, the one that we are in, the first quarter. Expectations are that it will have come down from that 3% range into a lower 2% range. Right now, the Atlanta Fed GDP now is trending at 2.1% for the quarter. However, and I want to point this out, they will be able to include the durable goods numbers when that comes out. They have Wednesday, March 27, as an upgrade for their estimates. Again, this will be for the first quarter of this year. And remember, the expectations are that it will be in the 2% range and a lower 2% range.

Quincy Krosby:

And then also we are going to have pending home sales and that will come out on Thursday. But in addition to all of this, I want to make it very clear about the PCE because it will matter. It will matter in the futures market when the futures market opens for next week. But the expectations are that the core PCE, Personal Consumption Expenditure Index, will be a bit higher rather than lower. It would obviously be a positive surprise if it comes in lower, but the expectations are that it will come in a bit higher. If that is the case, and this would be the year over year report, the market will say, okay. It came in within expectations. That's okay, we knew it. It is. If it goes higher than expectations, the market will be, well, we didn't realize this. This is even worse than we thought.

Quincy Krosby:

Still in all, if the market feels as if the inflation is continuing to come down, the market will be satisfied with that. It's extremely important. But overall, what the market wants is a scenario in which the Fed cuts rates because the economy is still solid, although not stellar, but still solid and inflation is coming down enough that the Fed feels they don't need to keep rates higher for longer. That is the scenario that the market wants. Obviously the Fed will cut rates if there's major deterioration in the labor market, but that is not something that the market would want. And the reason for that is quite simple. If the labor market deteriorates, and by the way, historically when the labor market begins to deteriorate, meaning more and more layoffs, quicker layoffs, headline layoffs, it tends to move quickly and all of a sudden you just see the unemployment rate climbing, climbing.

Quincy Krosby:

Well, what also happens is, which is logical, personal income comes down and consumer spending 70% of the economy slows and slows dramatically. Yes, the Fed can cut rates, but the damage is done. And so you need those rate cut to come in and help, you know, assuage fears that the economy is slowing and that the Fed hasn't done anything. No, the Fed will come in and do something and do it quite quickly, but that's not the scenario that the market will like. Also, another scenario, and that is what happens if the Fed doesn't deliver on those rate cuts? What happens if the criticism about the Fed's three cuts this year dot plot? What happens if that doesn't materialize? Well, what happens is something has to take the place of it for the market, and that would have to be earnings. And right now, earnings still look solid, but the forecasts are pulling back from the higher revisions.

Quincy Krosby:

They're pulling back. Is it terrible? No, it is not. But nonetheless, profits will have to come in to take the place of those rate cuts because what the rate cuts do is obviously global financial conditions become easier, the U.S. dollar weakens, that helps the big companies in the S&P 500 that export. Rate cuts help tremendously for the market. Without that, then the market itself is going to have to depend on yes, earnings, earnings and guidance and so on. We are still a bit away about two weeks away from the opening of the earnings season, but nonetheless, the market is focused on what these data releases suggest that the Fed will be able to work with and that is inflation. And then ultimately when we have the labor market report. So a lot for this market to absorb, especially in a week. That is a shortened week with the stock market closed on Good Friday. We will be back again next week. Thank you so much. Please have a very good long weekend. Thank you.

Speaker 2:

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Speaker 2:

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