Shortened Holiday Week but with Heavy Macro Calendar

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. It's Monday morning, and it is July 1. And in the shortened week, remember not only do we have the fourth off, but on the third, the markets close early, about one o'clock in the afternoon. Nonetheless, as we finished up last week, please remember that on Friday of last week, it was the Russell Indices that had its reconstitution, or rebalancing. It is actually, in fact, the heaviest volume day of the year and it happens once a year. It's the end of June. It's the last Friday. And so there was quite a bit of churning, quite a bit of selling. But remember too that when we started today, the market has new money coming in typically at the beginning of a quarter,

Quincy Krosby:

and that money has to be placed. Also, we also have to keep in mind in terms of seasonality. Now we always talk about seasonality. Is it a hundred percent? No, but it is, the pattern is actually quite strong, and that indicates that the month of July tends to be a positive month for the market. And not surprisingly, the first half of July tends to be the strongest part of that month. And obviously if you have new money coming in, that money has to be placed. Also, by the time we move toward the end of July, we'll be looking forward to earnings. And we know that that is going to be extremely important, particularly for a market that surged 15% from the beginning of the year. And, yes, and I think everyone knows what the and is or however, just a handful of stocks getting us there.

Quincy Krosby:

And that handful of stocks actually helped push the valuation of the market higher. And, in essence, four the, or just five names. We know the names. You know the names. I don't have to waste my minutes on that, big mega tech. So it's going to be an important, very important period. Also, last week until we get to this week, last week we had the personal consumption expenditures price index. And that did not disappoint. It indicated that disinflation, meaning inflation coming down, actually did come down. And it confirms that the trajectory of inflation is not stalled because that was a concern a number of months ago, that it was just wasn't moving any place. Little by little it is coming down and that was very good news for the market, extremely good news for the market. In any case, this week it's going to be important.

Quincy Krosby:

And let me just actually say that we're also seeing more of a confirmation in terms of the probability of a rate cut coming in September. Unless of course, you know, inflation just turns around and starts moving higher. The Fed has been out there speaking. We're going to have more Fedspeak this week, next week until they go into the blackout period. But they have been very clear that they want to make absolutely sure that inflation is continuing to come down and they don't want to be surprised that suddenly it turns up and then they wind up having it come back into the market and also beginning to tighten yet again.yet, That would be seen in the marketplace as a failure, a policy failure. The Fed is intent on not keeping that. And yet, and yet they have made it very clear, very clear that if the employment landscape deteriorates, they will be prepared to cut rates.

Quincy Krosby:

The head of the San Francisco Fed Daily, she made the comment. She said, look. The data had been fairly benign. She used that word. But if that changes in terms of the labor market, we'll be prepared to act. That's why this week, yes, this week we are going to have another data release having to do with employment. And the reason this is so important is we know what the link is between the payroll landscape and consumer spending. Consumer spending, nearly 70% of the economy, it slows down. Consumers pull back if they start to see headlines with the unemployment rate climbing. And when we look at the payroll numbers on Friday, July 5, remember there are two surveys. I won't get into it in this call. If you're interested, go online and look. There are two different surveys. The headline number that we had last month was solid, was very good. But under the surface, the unemployment rate ticked higher to 4%.

Quincy Krosby:

And as head of the San Francisco Fed said, Daily, she said, that's fairly benign. 4% is fairly benign, but it moved up from 3.9% to four. We'll be watching to see if it climbs higher. And that's going to be important because we cross a threshold of 4%. If it climbs higher, what the market will be worried about, by the way, is that it's going to continue climbing higher. Again, historical patterns show that once unemployment starts sticking higher, it tends to just sort of keep moving. In terms of the initial unemployment claims, they've been fairly steady. They inched higher but then they kind of leveled off. However, in the continuing claims that has moved higher. Again, it is not startling. It is not, you know, screaming problems. However, it is moving higher, suggesting that folks are having a difficult time getting new jobs.

Quincy Krosby:

And that's why Thursday mornings at 8:30 a.m. Eastern, these numbers become very important. And to repeat it is that the labor market is our link to consumer spending and consumers are being discerning. There's no doubt about it. We're seeing it across the board. That doesn't mean a collapse. It just means a cooling in consumer spending. And we have to be cognizant of the fact that when we talk about cooling, it does not equate to collapsing. In fact, what we see is Americans are taking cruises, Americans are flying, Americans are, you know, going to concerts, but they're being careful when they go into stores. They're being careful because they still feel that prices that they're paying for food is still too high. And they are worried about the job landscape that they're telling us that in their replies to some of the consumer confidence reports.

Quincy Krosby:

In any case, this week the market is trending higher. Again, money does come into the market, particularly after the a new quarter. So we saw churning and and selling and buying on Friday and now we're seeing money go to work. Today we had the S&P final U.S. Manufacturing Purchasing Manager index. This is different than the ISM, Institute for Supply Management, which is widely followed. The S&P standard and... final U.S. Manufacturing PMI actually showed that it pulled back a little bit, but it is still in just slightly in expansion mode. This morning too, we had the Institute for Supply Management Manufacturing report and that shows it pulled back. It is a little bit in contraction, just below 50. But what we also saw there was that the prices paid component, remember, we're very focused on prices, actually leveled off. And that's extremely good news. And new orders were up and that is also actually important.

Quincy Krosby:

So it's still in contraction mode, but there are elements that are positive for the market. Also this week, we're going to hear Jerome Powell. He's in a conference in Portugal and that is the meetings that the ECB European Central Bank holds. We'll also have job openings, and I want to be careful about the job openings report. This is important because it has a pretty awful reputation of just not having it up to date. That sometimes job openings stay in there too long. Sometimes they don't get in there at all. But nonetheless, the market does pay attention to it and the expectations are, we'll see a little bit of a drop-off in job openings. But again, the methodology has kind of gone off the grid, so to speak, and they need to come in and they need to focus on getting that up to date.

Quincy Krosby:

Because it is a very important guideline for giving us a perspective on the job opening landscape. And we'll also get auto sales tomorrow on Wednesday. Yes, Wednesday is the ADP employment report. And, you know, it's interesting because a lot of folks say, well, it's the private sector report. It doesn't cover that much. But it is important because it is the private sector precisely for that reason. And the expectations are that for June, we will see an uptick from the last report and that should go consensus as far as consensus goes to about 170,000 new jobs. We will be looking in that report to see which sectors are hiring and also the wages. Remember we're always focused on the wages and we'll look to see where wages are moving. We don't want wages galloping higher. They can inch higher, which is, you know, given the prices in food still and so on, well you want to see it actually itch up but not move up too much because that would be, well, it would have inflationary implications. And then in terms of initial unemployment claims, right now the market is expecting about 235,000 new unemployment claims. That's a little bit higher than expectations, but still in the realm of being resilient and solid. In addition to that, we are going to have factoring orders and expectations are that they do come down. And then this one is very important for the market. I mentioned the ISM manufacturing report that we saw today. We will have the service sector ISM report and that is the largest component of the economy. What are we looking for? We want to make sure it's in expansion territory, over 50, and expectations are, it may be pulled back a little bit, but it will be an expansion territory. And in addition to that, we want to see new orders and we want to see employment expectations as well as prices paid.

Quincy Krosby:

We want to see that pull back. Don't want to see it climbing higher because then if it all pulls back when manufacturing the services, it confirms what we're seeing from the PCE report that we had on Friday. And the CPI report that we had before the PCE report, Consumer Price Index confirming that prices are leveling off. They're coming down. And that is very important for the Fed. By the way, on Wednesday, we will also have minutes of the Fed's last meeting. And I want to see that to see if there's anything else that we could get from that. I mean, they're all out speaking. We know what they're thinking. But remember that was the meeting where we had the so-called dot plot and they were all over the place. They were like, no rate hikes. Maybe we raise rates. I, you know, no. No one did. No one actually said that we would raise rates.

Quincy Krosby:

I take that back because that would've been terrible. But the fact is, it was all over. There was no consensus whatsoever. And as you know from the Fed speakers that we've heard this past week and last week, there is no consensus. They have different opinions, which I find interesting because normally when they come out of a Fed meeting, they come out with an orchestrated message. And by and large it has been, you know, the Fed is data dependent. The Fed wants to make absolutely clear before they cut rates, that they're sure that the trajectory of inflation remains on the downside. But nonetheless, there have been those who, when they answer questions or just sort of pausing for a minute, come out with something a little bit different and we want to see what those minutes said. And then of course we have the holiday, but Friday, it is a big day.

Quincy Krosby:

It's a very big day for the market. And because it is Employment Friday and to repeat it is extremely important, both the ADP private report that we get midweek and the Friday report, which includes employment within government. We want to see does the sectors that are hiring, does it match with what we saw in the ADP report? We want to see average hourly wages. Expectations are, they pulled back just a little bit and we'll look for hourly wages year over year. And again, expectations are just a tad down. Remember that's what the market wants to see. Doesn't, you don't want to see a collapse just a tad down. And we expect the unemployment rate absent a surprise to remain at 4%. One of the things I want to mention in this call is this. When we look at the Treasury market, we don't want to see those yields collapsing. Just coming down. Boom. Very, very quickly. Because in the market's view, it would be reflective of belief that the economy is collapsing, not just cooling, but collapsing. If it came down very, very quickly.

Quincy Krosby:

So you want to see it kinda steady and inching, inching, not even edging, but inching just a little bit lower. When we look overseas, I do want to mention this because on our 4th of July, how appropriate is this? We will see the results of an election in the U.K. The expectations there happen to be that the Labor Party takes over from the Torries, which is the conservative party. The expectations are, it'll be a very strong victory for the Labor Party. So we'll see that probably towards the end of the day or maybe we have to go into the fifth. Also, keep in mind there was a snap election called, just like in the U.K., in France. What we see is that the far-right party saw voters coming in from all over the country, villages, towns, cities, voting. However, when all was said and done on that voting day, the first round, that's what we call it, the first round of voting, the far-right party called the National Rally did not receive an overwhelming majority victory.

Quincy Krosby:

In other words, if they only had that, they would be no competition. They would be running the country. They didn't get that. And you get on July 7, the second round. And when we go over history, actually sometimes you get a really kind of different view from the second round that we will see on July 7. I don't know if that's going to follow, but this is what's going on. The ultra left-wing, and that includes the socialists actually, some of the communists, the green party. A whole bunch of them. A whole block. Coupled with Emmanuel Macron's party, the Centrist party, the party that leads right now, because he is after all the president. They are trying to put together a block. Something that will block the ability for the far-right to claim a major victory. A mandate on July 7. That's what they're trying to do.

Quincy Krosby:

I don't know how successful it will be, but based on the view today this Monday, the view is that they have a good chance of being able to do that. In other words, what would happen is there would be gridlock. There would be gridlock in the parliament and in the leadership in France. And if I have to point this out to everyone listening to this call, gridlock isn't bad. It's checks and balances on spending. Checks and balances on just about everything. In fact, in our own country here in the U.S., sometimes when we have gridlock, the market really kind of likes it. And we will have our own sense of it when we get to our election. So we're watching everything and the markets are, the markets, you know, are adjusting. And right now the market, according to the data that we see in the market narrative out of France, is that they do believe that they may just be able to block a full, full far-right decisive mandate for the far-right party in France.

Quincy Krosby:

And by the way, the reason they want to do that is the Far-rights platform is for cutting the value added tax, cutting it down. Bringing down the retirement rate and bringing it down actually not just one percentage point, but a bit and enough for people to say, whoa. This is much better than what we have. And also to lower taxes on electricity and fuel usage. So a broad benefits package that actually would be very expensive and push the budget up. Also, there are concerns that the relationship between France, if they were to win, if the far-right were to win, a decisive mandate and the relationship with the European Parliament, that that would be much bumpier than it has been. So there's a lot riding on this and we'll see how successful the attempt to block that a decisive victory would be and how the market would react. Thank you very much. Have a very safe 4th of July. Lot going on in the markets and, you know, the markets move. The markets have no feeling. The markets have no sense of gratitude or anything. The market's just moving and maybe that's a good thing because we need to see how the markets view each and every headline. Each and every scenario. And pretty soon it'll be how the markets view earnings because that will be key as we move deeper into the second quarter. Thank you all very much. Have a good week. Bye-Bye.

Quincy Krosby:

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Quincy Krosby:

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