A Week Filled with Fed, However, Focus Is Key Inflation Print

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's the Talking Point. It's Monday morning, July 8, and I look at the market and the futures are up and, as we know, it is the end of the day that matters. And we see activity coming into the market. Typically toward the end of the day, either the buying, or, shall I say, the selling. What we're seeing in the market right now is a market that is very focused on the data. This week we have the consumer price index, the producer price index, we have Chairman Powell up on Capitol Hill this week, and we have a full parade of Fed speakers coming out this week to speak. But I want to go back to last week for a couple of explanations that are very important as we monitor the market and the signals from the market and the economic data.

Quincy Krosby:

First of all, we saw last week the PMI reports. Those are the Purchasing Manager Index, PMI, from the Institute for Supply Management. That's the ISM. They have one for manufacturing, and they have one for the service sector. And we all know that the service sector, which is called also the non-manufacturing report, happens to represent and reflect the broadest part of our economy. Manufacturing has been in contraction, meaning it is below that very important line of 50. Above 50 is expansion. Below 50 is contraction. So manufacturing has been in contraction across the country. There are some indications that manufacturing is picking up a little bit, but overall, broadly speaking, below 50. The service sector has been above 50, until the last report. It came in below 50, and obviously it is in contraction. Now, if I go under the hood and look at the individual segments, I could say, well. It wasn't that bad, but the nonetheless, it did pull back and went into contraction.

Quincy Krosby:

This coupled with the payroll report, I do want to mention this because I do think it is very important and it needs an explanation. We saw that the headline number at 206,000 new jobs was above what the market had expected, which was about 190,000 new jobs. However, the two months proceeding saw a revision. Downward revisions. We don't want to see downward revisions. It, you know, portends a deeper cooling off in the economy. However, that is exactly what happened. And then the unemployment rate climb from 4% to 4.1%. 4% was the estimate, the consensus estimate, for analysts suggesting what we would, in fact, see. I could put a positive spin on that 4.1% and this is what it is. We saw the participation rate in the employment numbers, that the participation rate picked up and it picked up. You want to see that. You want to see more people coming in and looking for jobs, which is exactly what we saw.

Quincy Krosby:

Now, if they don't get those jobs quickly, it reflects negatively on the unemployment rate. If they came in and found jobs quickly, the unemployment rate actually could have moved down perhaps to 3.9%. So that is the positive explanation for that 4.1%. Still the market saw that and thought, hmm, this is interesting because what we know from historical patterns is that when the unemployment rate ticks higher, it very often, not always, but very often, continues to tick higher. Goes from 4.1, 4.2, 4.3. But that is not a hundred percent of the time, but it's enough of a pattern that has this market worried that perhaps we are cooling. Yes, cooling off too quickly. The estimates for GDP for the second quarter have now been ratcheted downward. If you look at one of them that's widely followed by Wall Street is the Atlanta Fed GDP. Now for the second quarter, they have revised downward their GDP forecast from 1.7% to 1.5%.

Quincy Krosby:

This is important because cooling is exactly what the Fed wanted because the thinking is, the more it cools, the more we're going to be killing off inflation. But there's a fine line between kind of cooling off inflation, but also also having the economy cool to quickly. So therefore, when we look at the 10-year Treasury yield, and also the two-year, which responded very, very quickly, when those payroll reports came out, in other words, the yields came down quickly. The question that the market has is, is this really a reflection of the Treasury market thinking, whoa. This cooling off is happening maybe too quickly and maybe too much, and therefore, because you saw the equity market claim higher, does this mean that the Fed is getting the memo? Is it getting the message? You going to cut rates because remember Chairman Powell has said, if we see a deterioration in the labor market, we will come in and cut rates.

Quincy Krosby:

And, by the way, a number of Fed speakers have come in and said exactly the same thing, but was this enough for them to get worried about the labor market and worried about a cooling economy? And remember the linkage, the linkage is about the consumer. That the consumer begins to get worried about their jobs, holds back spending. And as we represent 68% of the economy, that is not something that the market wants to see happening. But then the other part of it is, what about corporations? What about small business owners? Do they become worried and say, gee. You know, this is, this is not good. Our margins are actually coming in. They're narrowing. Maybe we need to let more people go. That's the train of thought. So it's important this week as we get through the data releases, to keep that in mind of what the market may be thinking and may be worried about looking ahead in the summer.

Quincy Krosby:

Now July tends to be a positive month for the market in terms of seasonality. The first two weeks are typically very attractive for the market. And then the second week holds on statistically to the gains but then we get into a dicier period in August and even September. Not to mention the geopolitical events, not to mention our own events in terms of the election. But this week it's going to be very important. Chairman Powell goes up on Capitol Hill. On Wednesday, he will be at the House of Representatives. He also goes to the Senate. And when he's at the Senate, which would be Tuesday, tomorrow, then the house typically, typically, he reads the same exact speech. So that doesn't change, but certainly the questions change and maybe his answers stay the same. The thinking right now is he's not going to deviate from what he has been saying.

Quincy Krosby:

That is the Fed needs more confirmation before they cut rates. The Fed needs more confirmation before they cut rates, over and over again. We'll see. But I can say this, that on the Senate side, we're already hearing the likes of the Senator from Massachusetts, Elizabeth Warren, coming out and saying, we need to see rate cuts. What's going on? Why don't you cut rates? People are suffering. And the House of Representatives, we're going to hear more of that because they represent the local communities and they represent, some of them, represent areas where the lower wage earners are under tremendous pressure. So they're going to hear, and we'll hear how he answers those questions. Also, this week we have more and more Fed speakers coming out, but in addition to that, we have on Friday the CPI, the Consumer Price Index. The hope is, and I say hope because the market is hoping very much that we see a continuation of disinflation.

Quincy Krosby:

Remember that the path down towards 2% had stalled, and finally it opened up a bit. And the hope now is from the market and expectations from the market is that the disinflation, meaning lower inflation, continues to show up in the Consumer Price Index. To repeat, if you listen to these calls, what the CPI is based on, it's based on consumer surveys. The Fed's preferred measure of inflation, which is the PCE, the Personal Consumptions Expenditure price index. That comes from corporations, companies telling and giving information about what they're charging. But nonetheless, both of these reports are extremely important. And last time we had the Consumer Price Index report, it did indicate a slight, slight, albeit slower, but slight coming down with disinflation. Also, the Producer Price Index follows, and that is extremely important, we will get that on Friday as well, is that we saw producer prices coming down from the last report.

Quincy Krosby:

The expectations are right now that it will be a little bit lower, but probably not as low as the last reading. This is what we call consensus estimates. All the analysts coming in and offering their opinion of where it's going to fall. So this week has an awful lot for this market to digest, and if that were not enough, we are going to begin the earning season in earnest. This begins on Friday with the banks, and these will be the large money center banks. And what we're going to listen for? We will listen for, what are your customers telling you? Are they lending more? Are the corporate companies lending? What are they borrowing? How much is it lower than last month? Is what about the year over year? Also, the ones that have credit cards. This is important. Are they seeing more late payments?

Quincy Krosby:

Who's paying late? Is it the very low wage earner? Or, and please keep this in mind, is it the group that's just above the lower wage earner? Those are in the lower end of the middle class. Are they suffering? So you can have delinquencies picking up, you can have late payments picking up. What the market wants to know is where is this coming from? Which group is suffering? Because if it goes up the wage class, you are going to see obviously more problems with consumer spending. So we're going to be paying attention to that. We're going to be paying attention to their view on the economy and their views on, you know, where the economy is headed. And for some of the banks, it will be, they'll give a global view. Also, the market wants to know what about share buybacks because they pass the stress test and already Wall Street is coming up with lists of who's doing what or who's going to be buying back more shares, who's going to sweeten dividends.

Quincy Krosby:

That's what the market wants to hear. So there's an awful lot for this market to focus on this week, but the inflation report is crucial. And obviously the market wants to hear more from Chairman Powell, particularly after that payroll report. And particularly after what we saw in the service sector from the Purchasing Manager Index of the ISN, that's the Institute for Supply Management, that went into contraction territory. I'm going to be paying attention tomorrow, by the way, on Tuesday morning to the National Federation Independent Businesses, their optimism index. This to me is extremely important. They are the backbone of our country, the small business owners, and they're focused on sales. They don't, you know, they don't want anything to get in the way of what are they going to be able to sell. So we're going to listen to whether or not they believe prices are heading higher.

Quincy Krosby:

Are they paying more? Because obviously that would be inflationary. And how are they doing? What are they expecting for sales? Are they more optimistic or less optimistic? They, again, are the backbone for our country. They actually are the biggest employers all told together for the United States of America. So we want to hear what they have to say. I think it's going to be important, particularly when we are at an inflection point in terms of the economic data. And I think again, it's going to be a very interesting, important, you're going to hear more from Wall Street following it. So overall, a very busy week and a very important week. Just as now an aside here, I know many of you follow the global markets or international markets because that does not include the U.S. Global includes the U.S. The runoff in France kept the far-right party called the National Rally Party out.

Quincy Krosby:

They basically came in third, but it was done as the leading party. If they want to call the centrist, that is President Emmanuel Macron's party and calling them the leading party simply because they are in power right now. But obviously they were weakened tremendously. But what they did was they made sure that the far-left group of parties, and boy, it is a coalition that, you really wouldn't want to be in the far-left, very far-left, that basically hates capitalism to the ones that are less anti-capitalism to the climate party. All of them, all in together. They've got them in together to create a stronghold to keep the Marine Le Pen's party, that far-right party, from gaining enough seats to a, have a decisive victory, but even to lead. And in fact, it worked. It actually worked so well that right now that left that left-wing coalition.

Quincy Krosby:

That left-wing block is came in first followed by Emmanuel Macron, who's the president, his party, which is a centrist centrist block, came in second and the far-right party came in third. However, no one got a decisive victory, which means there's going to be gridlock. We call that a hung parliament. The question actually in the market is does this create chaos confusion or can they cobble together something to keep the government running? They may put in technocrats, meaning they're not necessarily very political, but just to keep things running. Right now in France, the equity market, this is now on Monday, our Monday morning, actually paired some of the losses and we're seeing dip buyers come in. But ultimately the market is going to focus. And when I say the market, I mean when we look at the Euro, for example, and the broader market is going to be looking at the yields on the French sovereign debt. Does it climb higher?

Quincy Krosby:

And making the German debt, the actually the place where you want to go if you're buying debt? Because if it starts climbing higher as it did, you know, with that surprise victory in the European Parliament and then Emmanuel Macron saying, hey. You know what, we're going to have a snap election to see where this goes. That French sovereign debt, woo. It went right up. The yields went right up to the benefit of the German bonds, their own sovereign bonds. We're going to watch this because it will be the reflection of whether or not they can govern at the margin. Even though it's gridlock, can they actually govern or does it cause so much confusion, paralysis and ultimately chaos that those yields just, you know, just push, push, push up. But again, right now the response has been fairly muted. We did see dip buyers coming into the equity market. We'll be monitoring this. Thank you very much. Have a very good week. We'll be back next week.

Quincy Krosby:

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Quincy Krosby:

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