Week of Fedspeak and Key Treasury Auctions

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 Monday morning, May 6, and this is the Talking Point. Thank you for joining me. This week is a week that really is kind of light on macroeconomic data. Although, and I want to point this out, we're going to have a consumer credit report and that'll come out tomorrow on Tuesday. We want to hear whether or not consumers have been able to get credit. Has it been easy? What do the banks say about that? And it's important, especially because we're so focused on what the consumer is thinking and doing, spending, and whether or not they're having trouble getting credit from banks. So we want to hear about that. But this week is a week where we will have all of the Fed speakers coming out. It looks as if almost every day there are a couple of Fed speakers coming out.

Quincy Krosby:

I'm going to be paying attention to the vice chair at the Fed. He's going to be speaking on Wednesday. This is Philip Jefferson. The reason I like to hear from the vice chair is that typically, it is in concert with what the chair is thinking. Very rarely do you see the vice chair go rogue, you know, deviating from what the Federal Open Market Committee thinks. By the way, that's what we call the Fed. But certainly not from where the chair comes in on issues. So it's going to be interesting to hear him. He's speaking at 11 o'clock on Wednesday morning. Also this week we have two big auctions, and the Treasury auctions are so important. I think everyone on this call knows why, because we need to see where they settle. And this week, we're going to have on Wednesday $42 billion of 10-year Treasuries. And then on Thursday, $25 billion of 30-years.

Quincy Krosby:

And it is so important. It's important for the bond market and it's also important for the equity market. The equity market that is so focused on where yields are headed. These auctions, again, where they settle really can affect the entire yield curve, but also, again, the equity market. So the market's going to be focused on that and whether or not there are enough buyers coming in at these auctions, and if so, are they foreign buyers? We've seen a pickup in some foreign buying because they love the yield. And are we seeing domestic buyers? So I think it's going to be important this week. Also this week, in terms of where the market is headed, we have earnings. It's not as if the earning season is over. And by the way, the earning season has been doing all right. I wouldn't say it's stellar, but it has been actually solid.

Quincy Krosby:

And what more can you ask? I mean, obviously guidance has been so important. You followed Apple last week. Apple came in, they were better than forecast. It wasn't great, but especially in China, it was a little bit better than the market had anticipated. But also it was Apple's guidance and one other thing, the share buyback. Oh yes, share buyback. This was the largest in history for the share buyback for Apple and the market loved it. The question now is, where does Apple go given Apple's dominance in indexes across the landscape? So they have a program this week, it'll be about their iPad. They're going to do it online and we'll see whether or not, whether it leads to any excitement for Apple. Apple also said, and this was important, this is something the market is paying attention to with all of the technology companies, is AI. What are you doing with AI?

Quincy Krosby:

What are your plans? And they answered that to some degree. But again, what the market wants to see is, is it in your products? Tell us about that. And I think this week, the program that they have set up could be important for that as well. So we're going to be paying attention to that. And remember, we have to wait until the 22 for NvidiA. And people always ask, why the 22? Why aren't they there with Meta? Why aren't they there with Alphabet and so on? Well, the reason is that Nvidia was a gaming company. I mean, they focused on the infrastructure for gaming. And so they came at, you know, a different part of the earning season and they still are there. And they're very important right now when we do hear from them, but that won't be until May 22. So the market was taken a bit of relief last week when the Federal Reserve basically came in and said, look, it's not likely that was the word that Chairman Powell used.

Quincy Krosby:

It was not likely that they're going to raise rates. The market just fell in love with that. But also, that they are slowing down their quantitative tightening program. Remember, quantitative easing provides liquidity in markets. When the Fed buys bonds, it brings down the bond yields. The Fed comes in with quantitative easing when, for example with Covid, when they felt that the market and the economy needed help. Well, quantitative tightening is when central banks unwind those big positions. And so what the Fed basically said was, look, yes, we want to unwind, but right now we will slow down that unwinding. And that was very important for the market as well, because what it does is it helps provide liquidity for the market. So the market was very pleased as everyone I think saw with the Fed. And following that, the market is basically enjoyed a pullback.

Quincy Krosby:

Many thought that the pullback should have been deeper, steeper so we could kind of get it over with and then enjoy a recovery. In terms of seasonality, you know, everyone thinks sell in May and go away, but the fact of the matter is May has been actually important for the market. And market has done well during many periods in May. Right now, what the market is enjoying as well is this. Is the fact that the payroll report that came in on Friday actually showed a bit of a slowdown. Not a stall by any means, but just slowing down from those hotter numbers that we have seen and perhaps normalizing. So the unemployment rate climbed from 3.8% to 3.9%, which by the way is still low. It's below 4%. And then also, very important for the Fed and we saw for the market, and that is that wage growth, hourly wage growth. Leveled off.

Quincy Krosby:

That was a really important issue for Fed and the market. Then, obviously the market received this information on Friday, and the market went up. Now, as far as the Fed is concerned, this will be important, but the fact is they need to see more of this. So let me explain the ISM, Institute for Supply Management reports, which are very important for the market. They're widely followed by economists and traders alike. For manufacturing, we pulled back. We were just over that important line in the sand, 50, where we go into expansion, but it pulled back below 50. Just below 50. However, prices paid up. The service sector, which of course is the largest component of our economy, also pulled back. And there too, prices paid up. This is not what the Fed wants to see, nor does the market want to see this. Because what typically happens is, and I keep repeating this, is that companies want to pass along those costs to their end buyer.

Quincy Krosby:

You know, whether it's a consumer or a business. Fact of the matter is, consumers are basically holding back and saying no. And remember, we talked about this earlier on this call, that consumers look as if they're going and buying off brands so that I don't buy the whole brand, the famous brand, but I buy manufacturer that maybe actually is the real manufacturer, but nonetheless, it's cheaper. This is what consumers are doing and saying, not so fast. Don't pass along these costs to me. Now, did the consumer stop spending? You would think that consumers just stop spending completely not so fast on that either. We were buying vehicles. Oh yes. You don't hear anybody talking about that, but you know, if you've been out there buying even a used car or a new one, it is expensive. And so typically what happens is when you have a big ticket item like that, you'll try to slow down spending elsewhere because the costs are material in your budget.

Quincy Krosby:

But consumers were buying vehicles, and that I think is significant. It helps us help explain a bit of a slowdown elsewhere by the U.S. consumer. But nonetheless, we go into this week, in the beginning of May, as we go through this week, the seasonality that is associated with May meaning go away May. You know, just go away. Eases up. And we go into actually an attractive period for the market. But one thing we are also going to be looking at is on Friday, the consumer sentiment report. Because we've seen consumer sentiment conference board, for example, and the University of Michigan's own consumer sentiment report shows that consumers are more negative. They're worried about jobs. They're worried about the economy. They're just worried. And also they see the higher prices not going away. And they point to, you named it, gasoline.

Quincy Krosby:

Gasoline prices are still high. The question is, what will it take to get those prices down? And that's a big if, because this is an election season and incumbent does not want gasoline prices climbing higher, especially as the driving season picks up. So this is going to be a very interesting period to see whether or not the prices can keep rising or are they going to start pulling back. The other issue for this market is, as well, does the market continue to broaden out? And by that, I mentioned the Russell 2000, which is the small and mid cap. They've had a nice run. And the question is, do they continue to see investors go into the small and mid cap names or, or are we going to see, you know, basically a pullback there? If you go on the charts, you will see that you have one day, two days, three days, four days, and then sort of stops.

Quincy Krosby:

And the reason is that small and mid caps are just that. And so valuations tend to inch higher much more quickly than with the S&P 500, obviously. And what you have is a scenario in which they have to digest those gains. So we're going to see whether or not that pattern remains. But overall, this is going to be an important week for the market and that is because the pullback, seemingly over, there are many who say, oh, just not so fast. The market still needs to do a bit more pulling back and get some of that froth out. Nonetheless, we've seen the financials do well and that's part of the broadening out, obviously it is. And we'll see if the financials can maintain a position, even if the big tech starts gaining and if Apple gains following its program this week on the iPad, upgraded iPad I should say.

Quincy Krosby:

But again, my point is all eyes are also on those Treasury yields, and that's why when I started, I mentioned the importance of those two auctions. Again, $42 billion of tenure on Wednesday, and $25 billion of the30-year coming on Thursday. We want to see that broad participation in those auctions and coming in and taking them down in a way that the yields don't climb higher. The other thing I want to mention today on this call is what I'm watching in terms of earnings. Yes, we still have earnings going on. I'm going to listen to Disney and the reason I'm going to pay attention to Disney, it is a major consumer name. I'm going to pay attention to what they say about attendance, particularly in their parks, the U.S. parks and overseas. Because that will give us a good picture, I think, of consumer spending. Because we know that these parks are very expensive, and we want to see whether or not Americans and whether or not in Europe or in Asia, whether or not we've seen a pullback in spending.

Quincy Krosby:

So I think it's going to be an important tell as we sit here and just try to figure out where this economy is headed. Where is it going? Following that report that we had where we saw the GDP for the last quarter coming down to 1.6%, even though as Chairman Powell mentioned, even though that it had to do more with imports versus exports and that under the hood, it looked like a still solid underpinning for the U.S. economy. So while there's not a lot of data coming out this week and earnings are starting to slow down, awful lot of Fedspeak. I'm paying attention to Philip Jefferson who is the vice chair speaking on Wednesday morning. Because typically the vice chair speaks in concert with what the committee thinks. That is the Federal Open Market Committee that we see as the Fed, what they think, but also very important of what the chair is thinking. And so we want to hear what he has to say. So it's going to be a busy week, but a week that is not as busy with heavy, heavy earnings and also with onslaught of economic data releases. So have a good week. We'll be back next week. Thank you so much.

Quincy Krosby:

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Quincy Krosby:

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