A Week of Earnings, Fedspeak, and Middle East Focus

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 is The Talking Point. It's Monday morning, April 15, and it looks as though the market is going to open up in the green. This is an important week following a difficult weekend for the market. We saw the market sell-off last Friday for a variety of reasons. One of the reasons was, not that the big banks that came in were doing poorly, but it was their outlook that concerned markets, particularly from Citibank. Nonetheless, the other aspect for Friday's sell-off came when it was clear that there was going to be a retaliatory strike by Iran, not by one of the Iranian surrogates, which by the way include Hamas, include Hezbollah and the Houthis who are active in the Red Sea. These are all considered to be proxies, paid proxies, for Iran. The Iranians made it clear that there would be a retaliatory strike on Israel and that they were going to do it very soon.

Quincy Krosby:

So once that was taken into the market, the sell-off actually gained momentum. As it turned out, the retaliatory strike was done. The Israelis were able to fort and circumvent any of the damage that could have been brought if they hadn't been intercepted. And interestingly, the Israelis were joined, not just by the U.S. and the U.K., but by Jordan and a couple of other Middle Eastern countries. No one in that region wants to see a, you know, broader outbreak of war. So all of the safe haven purchases that we look for... gold, Treasuries, for example. All of them have actually indicated over the weekend and into today, into this morning, that they see that maybe a calm, because one thing is for sure diplomatic efforts have been stepped up dramatically to keep this contained and contained as much as possible, and to try to make sure that the Israelis don't then go out and retaliate again following this retaliation.

Quincy Krosby:

But the point is that we look to the markets to give us indication so oil prices have actually edged lower. And also remember, if this war were to break out deeper into the oil-producing region, right in Iran or Iran's backyard, oil prices would've escalated dramatically. Oil prices are actually down a bit. Similarly, you would've seen a march into U.S. Treasuries for safe haven, and that would've brought the yields down. And actually the more worry there was, the heavier the buying would be, and yields would also come down quite, quite markedly. We haven't seen that this morning. Yields are up and it indicates again, just along with oil prices, that there's a kind of sigh of relief that this wasn't worse. And in terms of gold, because gold is always a risk, you know, risk-off haven for safe haven buying. Gold prices are still high.

Quincy Krosby:

But remember, gold prices were moving higher as well because of gold watching any inflationary activity. Any inflationary activity in the U.S. to see when the Federal Reserve may be pointing to rate cuts, which by the way, if there was inflation, that is getting stickier and stickier for the gold market watching. It would also indicate that perhaps that the Fed would move too rapidly. You'll hear a lot of narrative about gold watching to see whether or not the Federal Reserve comes in and starts cutting rates. But, and I have to point this out, if the gold market believes that the Fed would come in too early, while inflation was still sticky, then gold would be looking for signs as they always do historically, for any signs of even more inflation and stagflation. Also, we are seeing quite a bit of gold buying from retail buyers in the United States, in China, and also in India, I want to point out, for different reasons, for the religious ceremonies, particularly surrounding weddings that take place sporadically during the year, but particularly in the fall. And the prices have gone up so much that actually I'm reading interesting articles that the Indian gold fellers are looking to trim costs for buyers because it's been slowing down. It's gotten so expensive. So again, this morning the equity market is in the green in terms of the futures, and we want to make sure that we watch all of this and watch any of the headlines. This is a headline-driven market until the market is convinced, absolutely convinced, that diplomatic efforts are being heated in terms of a slowdown in this Israeli-Iranian escalation that again led to the retaliatory strike this weekend. So also this week is a heavy, heavy week for earnings. We have more banks. You saw Goldman Sachs. But we also have Netflix coming, and the reason I mention Netflix is that only that usually when Netflix comes in with their earnings, it tends to be a template for other tech earnings. But we always would watch it and see what do they have to say in terms of new subscribers? And that's very important for Netflix. Also, obviously there's advertising now, so there's, you know, you have an option to get Netflix, pay less, but you have advertising. So we'll be watching that as well. But again, with a host of other banks, regional banks, that's, we want to hear what they have to say about the particular regions that they're in. Especially in terms of activity regarding their credit card holders, and whether or not they're seeing a continuation of late payments. Not to mention their real estate holdings and how the higher rates are affecting their real estate holdings.

Quincy Krosby:

So there's a lot for the market to digest over this week. But in addition to all of that, we just had retail sales this morning and they actually surprised to the upside. Retail sales were strong, and there's always that positive correlation between a strong labor market and retail sales. The consumer is 70% of our economy, but what we do know is, is the labor market begins to deteriorate with higher unemployment numbers. What we are going to see is that consumer spending will slow down and it is a logical path for the consumer to then start being worried about the job market. So far, they've been holding up and these numbers that we saw this morning surprised to the upside. We're also this week going to get a lot of Fedspeak, as we have been getting, and what we want to hear regarding Fedspeak is whether or not they are all in agreement that, you know, the Fed has to be exceedingly careful about initiating the interest-easing cycle, you know, to cut rates.

Quincy Krosby:

And when did they see that first rate-cut coming? This is important because we're already seeing that the month of June, for example, has eased in terms of probability of a rate-cut in the month of June. We're also going to get quite a bit of housing-related data this week, including this morning. Home builder confidence. And the question is whether or not the home builder confidence index was able to incorporate the fact that the Fed doesn't seem to be pretty excited about cutting rates earlier in the summer. So we'll see. I don't, most likely the confidence may be thwarted by a perception that the Fed is staying a little bit higher for a little bit longer. Also, we're going to have housing starts and building permits. Again, extremely important. And we'll also keep in mind that one of the things that the builders do is that they tend to offer their own mortgage rates that are much more competitive than the headline number four mortgage rates.

Quincy Krosby:

And that's why they've been so successful as consumers who want to buy a house don't want to, you know, use the normal rate, which is actually staying high. They, builders, will help them ease that rate. But also what builders will do is to offer more benefits in terms of upgrades in a new house. And another thing that they do, and you'll hear it when the builders report, is that they will also cut the number of square feet for a potential buyer who says, you know what, I could do with less of a house. Let's cut here, let's cut there, and then cut the cost. So we're going to get that. We're also going to get industrial production, and that's going to be important because we think that that is going up. Consensus estimates indicate that it will be higher because we've seen factory activity climb higher in the last report, and industrial production typically moves.

Quincy Krosby:

We also have seen manufacturing bottoming and actually moving into positive territory, and that is just above 50, which is the line of expansion rather than contraction. And yet, I do want to point out that this morning the Empire Survey, which is a manufacturing survey, was actually pretty weak. It is not emblematic of the rest of the country, but we want to keep our eye on it because what we'll be looking at is whether or not the Philadelphia Fed Survey that comes also within a couple of days, whether or not that starts to pull back as well. What we have seen is that, again, manufacturing has for the most part bottomed and we want to make sure that process and we find that out again as we go around the country. It goes from the Empire Fed, which is New York, then it goes to the Philadelphia Fed Survey on manufacturing.

Quincy Krosby:

And that typically is much more indicative of the broader U.S. manufacturing activity. So we'll wait to see what we hear there. Let me also add that tomorrow we are going to hear from Jerome Powell, but also from the Fed's vice chair, and that would be Philip Jefferson. He typically in that role, speaks in conjunction, in concert with what the chair is saying. And overall, what the Federal Open Market Committee. That's the Fed. That's the actual committee that makes the decisions. So it's going to be important for the market to hear what they have to say. And then of course, on Wednesday we'll get the Fed Beige Book. And I always say that that name sounds so boring, doesn't it? And a lot of people find the beige book boring because it used to come out as a beige book. But keep in mind something. It is anecdotal and it is actually up to date.

Quincy Krosby:

And what it consists of is the Federal Reserve Banks that go around speaking to the business owners, small business owners, large business owners, and the banks within their regions. And they give a snapshot of economic activity and economic expectations and including inflationary outlooks. So increasingly that Fed Beige Book, when it is released, is followed by the market to give a much more up to date report. Remember, all the data that we have actually is looking back, and it goes back a number of weeks. Fed Beige Book, again to repeat, much more up to date and anecdotal. And again, more and more Fedspeak. So the market, in addition to this, in addition to having the Philadelphia Fed come out on Thursday with the manufacturing report, we also have more home prices, and this would be an existing home sales. We'll see how that is. But this week is about earnings.

Quincy Krosby:

It is about earnings, earnings, earnings. So again, we're paying attention to the banks, the regional banks coming out this week and what they are seeing in a more localized environment, more than, for example, what we had on Friday, which are the big money center banks, and then would go deeper, deeper into the U.S. economy. And I find that extremely interesting and important, important for giving us a snapshot of this U.S. economy and where it's headed. So again, a busy week for the market. The market continues to follow the Middle East. Don't think that it's suddenly off the radar. You'll get a snapshot from oil, you'll get a snapshot from the Treasuries, and you'll get a snapshot from gold. If things were to really heat up yet again but so far, so good. The market seems to believe that there is a halt in the retaliatory threats made by Israel and made by Iran. So we'll have a very busy week on all fronts. Have a very good week. We will be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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