A Week of Key Economic Data with a Focus on Inflation

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, and it is Monday morning, March 11. What we see this morning before the market opens is a sea of red. The market, you know, is going through a bit of a consolidation and this week there's enough macro-economic data to move the market in one direction or another. But I want to go over something from last week, if I may, and that was the payroll data. The payroll data came in and it was, how do I say this? Something for everybody, right? You had a stronger headline number, more than the market had expected. The market had expected about between 190,000 new jobs to maybe 200,000 new jobs, but what we had was a bit over that. And at the same time, we had the two previous months with downward revisions.

Quincy Krosby:

But when we go under the hood and kind of the things that we're looking for that help the Fed. Remember, the Fed is meeting on March 20, so they have to have enough data before they go in there for their dot plot. They're going to have that ‌at the March 20 meeting. But also for the statement is the tone from the payroll landscape. And we saw the unemployment rate climb to 3.9% from 3.7%. That is still healthy. However, as has been pointed out, we haven't seen a number like that in some time. That is to say, a higher unemployment rate. But the wages, which is something the Fed pays very close attention to, and I've talked about that in this call. The reason for that is when you have higher wages, one, people tend to spend more money and that could ignite inflation and people could be, well, we've got higher wages, we could pay the higher prices.

Quincy Krosby:

And remember, higher prices is what equates to inflation. And so the other part of the story is that when companies have to pay higher wages, they want to make sure that they are not the ones stuck with that. They try to raise their prices, whether it is, you know, in the services or in the capital goods. They try to have the final inch user pay for it. Well now< the wages came down and that was a positive, by the way, in this report. But overall, as we come into this week, one of the things that we are left with is a statement that Chairman Powell made when he was addressing the committees, the financial committees up on Capitol Hill. And this was actually when he spoke in front of the Senate, because usually the news is made when he speaks in front of the House of Representatives, not the whole House, I should point out.

Quincy Krosby:

It is the committee that focuses on the Federal Reserve and monetary policy. But this was at the Senate and he made this comment and he said, we are closer to a rate cut. That was really important for the market, and the market took that in. And in terms of probability, this is from the Fed funds for futures market. They are looking more at June and July as the time for a rate cut. If in fact, the Fed goes ahead and moves accordingly. So as we go into this week, we're going to have more data for the Fed to digest and the market to digest in terms of where inflation is headed and where it's been obviously because these are all looking back. And this week we're going to have the February Consumer Price Index. Now remember, this is a different vehicle than the Fed's preferred look at inflation, which is the PCE, Personal Consumption Expenditure, Index, where most of the information comes from corporate America, comes from, you know, companies.

Quincy Krosby:

Whereas the Consumer Price Index, the CPI, that comes from surveys. So that's the difference. Ostensibly, they all meet together with the same picture, the same narrative, the same story, but sometimes it is a little bit different. And we're going to be paying attention nonetheless because the market is very much focused on, yes, when the Fed cuts rates, and by the way, how many rate cuts do we think that the Fed is going to offer the market and the economy actually. But the market obviously is always obsessed about itself and that is to say the market. So we're going to get that report on Tuesday. We're going to have retail sales as well, and this is extremely important as everyone knows, because the strength of the consumer is the engine for the economy. The consumer represents about 68 to 69% of U.S. GDP. And what we want to see is the strength of retail sales.

Quincy Krosby:

We saw retail sales slow down a bit, but then what we saw was that Americans were buying vehicles. And you know what happens when you buy a vehicle? To me, it's like buying a house. It's that expensive. You tend to slow down your spending and other discretionary items when you have a vehicle because that becomes a very expensive monthly expenditure for the average American. Also on Thursday we're going to have industrial production and that certainly is going to be important at the end of the week. The industrial production, that, actually that's on Friday, but also the Michigan survey on consumer sentiment. We have seen consumer sentiment starting to come down, starting to ease a bit from the higher numbers that we've seen recently. And it's attributed to consumers saying, I'm worried about jobs. I'm worried about the job market. And that's interesting, right? When you still have a fairly resilient job market that consumers are saying that they're worried about it.

Quincy Krosby:

So it's going to be extremely important. Now also, one other thing, you know, we say that the earning season is over, and remember, we're looking at the fourth quarter earning season from 2023. But lo and behold, we still have some important earnings releases this week. We'll hear from Oracle, for example. And Oracle is interesting because they also offer a very interesting snapshot of global demand, and we pay attention to what they have to say. Also, we'll hear from Dollar Tree, and for obvious reasons, we want to know how lower-end wage earners, that's typically, that is their market, how they are spending, and also if they're seeing higher-weight journalists coming in. We tend to hear that from Walmart, for example, when they look at their credit card receipts of where are the people coming in from? Which wage group are they coming in from? But sometimes we want to hear that from the ones that typically cater to lower-wage earners.

Quincy Krosby:

So that will be Dollar Tree. And Williams-Sonoma, which is the other end. That's if you've got extra money and you want to get your kitchen all fixed up and glammed up. That would be Williams-Sonoma. We want to hear again, are they seeing foot traffic? Are folks coming in? And always, you know, this is after Christmas, right? So you're not expecting like a pre-Christmas surge, but we still want to hear what they have to say. It's important. Also, by the way, with 99% of the S&P 500 reporting in, we can say that what we're seeing is that 73% of the S&P 500 companies that reported they beat for profitability, which is important. That's good news. And 64% of those that reported exceeded revenue projections. That's very important. And so it was a basically a good earning season and especially as we had concerns going into the earning season.

Quincy Krosby:

One other thing that we found from the earning season for the fourth quarter overall was that operating margins held up and they were actually a bit healthier than initially expected, initially forecast when we went into that fourth quarter earning season. And that's good because margins are extremely important for companies. That's how they make money after they spend for wages and provisions and so on. So that was very good news. One last thing about the tone of this market. This market remains overbought. We talk about that a lot. Overbought and oversold. Markets do need to consolidate. It's healthy. It burns off some of the froth, and you want to see that. We haven't had much of that recently. Every time we thought we were going to have a consolidation, something comes along and just says, no, no, no, not yet. Well, we may be headed in that direction, but I want to point out that's what markets do.

Quincy Krosby:

And the month of March, typically in terms of seasonality, just seasonality, tends to be dicier for the market. However, in an election year it tends to be not a hundred percent, but according to the historical patterns, a bit more dicier. So expect that if we do have more than just one or two days of pulling back, that is not, you know, abnormal. That's what markets do and that is actually seen by most of the technicians healthier for a market. You just burn off a lot of that extra froth and then you start again seeing the market just kind of pull out of that. Overall, this market is very much focused on, as we all know, when the Fed is going to cut rates and how many rate cuts are we going to have. They're deciding that. They'll talk about it, but the Fed funds futures market, I want to repeat, is looking at the summer.

Quincy Krosby:

I do want to say that some of the leading doves at the Fed are actually suggesting that maybe we have a pause after that first rate cut. Which would be a small rate cut, absent, you know, the economy going downhill very quickly or some exogenous shock to the economy. That, you know, the Fed could actually pause a little bit. And again, for the market, what they want to see is a steady, steady drip of rate cuts. So far, the Fed speakers are not suggesting that that may be the pattern that ensues for 2024. We will see. Especially as the Fed gets ready for their March 20 meeting. Have a very good week. We'll be back next week. Thank you all so much.

Quincy Krosby:

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Quincy Krosby:

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