Reassuring Messages From the Bond Market

LPL Research provides some perspective on the DeepSeek-driven market selloff, reassuring messages from the bond market, and previews a very busy week ahead.

Last Edited by: LPL Research

Last Updated: January 28, 2025

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Jeff Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague Lawrence Gillum. We put equity strategy and fixed income strategy together. You got a pretty nice blend. How are you today, Lawrence?

Lawrence Gillum (00:14):

I'm doing great, Jeff. Yeah. Looking forward to the conversation. Lots to talk about today.

Jeff Buchbinder (00:19):

Oh my goodness, is there. Cross currents, needless to say. I don't know if there's an analogy between what I felt in my home office this morning and the markets, but we actually had an earthquake in New England and I felt it. I believe that's the first time I've ever really felt an earthquake. I mean, once, like they had one in New England like 12, 13 years ago. And I recall maybe feeling that a little bit, but it was a stretch. This one, I, I really felt, even though it wasn't as big as that last one. So crazy stuff, a lot of folks on social media didn't know what it was because they're rare around here. Have you ever felt an earthquake down there by you Lawrence?

Lawrence Gillum (01:05):

I have not. But I guess it just continues that string of crazy weather. I mean, Florida Panhandle got 10 inches of snow last week or two weeks ago or whatever it was, so crazy things are happening out there.

Jeff Buchbinder (01:19):

Yeah. No doubt. It is, it is crazy. And the markets and the news is a little bit crazy here as well this week, you know, just when you thought you could celebrate a second straight really strong up week for stocks, we were greeted Monday morning with a sharp sell off on this DeepSeek China AI tool that has, you know, shown the efficacy that's even better than some of the models, the AI large language models that we have in the U.S. So we'll talk a little bit about that. But you know, that doesn't take away from the fact that the stock market's done pretty well so far this year. We'll talk about what the bond market's telling us about inflation next. I mean, it's more than just inflation, but it's also what are the credit markets telling us.

Jeff Buchbinder (02:08):

So glad you're here, Lawrence, to do that. Because I can promise you I would've struggled if I was doing it without you. Next, earnings update, you know, it's a pretty good start to earnings season, but not a lot of upside still. I would argue that it's pretty good considering the headwinds. And then finally preview the Fed. Yet another reason why I'm excited to have Lawrence here with us for the fixed income perspective. So it is Monday afternoon, January 27, 2025, as we are recording this. The tech sector is down almost 6%, the S&P 500 down almost 2%. So no one cares that we had two good weeks in a row. People care about where we're heading next or where we're going now. So we'll be quick with this recap. But I think you know, the market came into last week and the Trump inauguration thinking we were going to get tariffs on day one, and we didn't.

Jeff Buchbinder (03:09):

So, you know, that was certainly one tailwind. I also think Lawrence, that lower rates were a little bit of a tailwind. They didn't move sharply lower, but they moved lower last week. And I think that puts some support under equities. Then lastly, and this is reversing today, of course, is the AI trade, right? This Stargate AI joint venture with Oracle and SoftBank and Open AI with 500 billion in capital investment. I think it's over four years. That is a really big chunk of change and certainly got the markets excited about tech last week. So you see, you know, comm services up five, tech up three and a half, and then some and you know, for the most part, even industrials has a little bit of AI in it, which is hurting it today. AI very, or industrials quite strong with 3% rally and in general, not across the board, but in general.

Jeff Buchbinder (04:13):

You know, the riskier sectors did better than the defenses and you had a growth led week. Internationally, the international markets did pretty well, actually. Europe is at a new all-time high, or at least it was at the end of last week. So seeing a little bit better performance there still, it doesn't really stand out so much relative to the U.S. Up 5.9% year to date, that includes this morning versus the S&P up 3.8. So yeah, a little bit better. But that's kind of you know, it's a short period of time, obviously. And then Japan had the rate hike as expected, Lawrence, I don't know if you think that maybe had something to do. Some are drawing conclusion that, that you know, the carry trade is tied to the Nasdaq. I get it. So do you think that the news out of Japan, even though it's late in the week, had anything to do with the risk on trade last week?

Lawrence Gillum (05:15):

Yeah, I think it, you know, it certainly contributed to a certain extent, but I think you know, your opening commentary was, was spot on. Just that there was this expectation for universal tariffs being applied or levied across, you know, all these different countries that didn't come to fruition. You know, we saw a rally in the rate market because of that, there was a lack of just tariffs implemented. So I think there was a couple good reasons why, you know, markets were higher last week. But you know, as you mentioned today that narrative has shifted a little bit.

Jeff Buchbinder (05:53):

Yeah, you know, we had the carry trade driven sell off in the U.S. equity markets back in August. That was over an 8% drawdown. Maybe the market was, to an extent kind of relieved. Yeah, that you know, we were prepared for what we got from the Bank of Japan and we didn't have much, much of a reaction. So here's your page. At least most of this page is yours, Lawrence, the bond market. So we had a pretty good, pretty good week in bond land.

Lawrence Gillum (06:18):

Yeah, so it was a positive week which had been few and far between within the fixed income markets since September or the end of September, rather. Treasury yields have just generally moved higher. Last week, we got some relief, as I mentioned. It was, you know, partly because of the no new tariffs that were expected by markets. You know, certainly there's been a lot of you know, discussion about tariffs. And I think bond markets were pricing in the you know, the Trump administration applying tariffs pretty liberally. But that didn't, that hasn't happened yet. We'll see if it actually does happen. I think the other reason why rates were lower is the Treasury Department has hit its debt ceiling, hit its debt limit, so there's no new additional Treasury issuance out there.

Lawrence Gillum (07:08):

Now, they can refinance existing debt, but the Treasury stock is going to stay at the same level now. So they're, you know, all these concerns about supply demand dynamics coming out of the out of the Treasury Department with, you know, all that Treasury supply coming to market to fill those budget deficits. I think last week was a reprieve, this week another one of those, you know, reasons why we're seeing lower rates. We'll get into this week, I'm sure as well. But nonetheless, it was a good, good-ish week for fixed income markets. The Ag up about 10 basis points, the investment grade corporate index up about 30 basis points. Plus sectors continue to do well. So we got the high-yield bond market up about 50 basis points, up about 1.2% this year. I was looking at spreads earlier.

Lawrence Gillum (07:53):

So spreads represent the additional compensation for owning riskier bonds versus Treasury securities. And despite the, the big sell off in the equity markets, we really haven't seen Treasury or I'm sorry credit spreads move too much, and we're going to talk more about that in just a second. But that's been an area of the market that has just been overly resilient, regardless of what's going on in the world. So, high-yield bonds up 50 basis points last week. And then you know, preferreds up about 50 basis points as well, so half a percent. So pretty good market for a lot of the fixed income markets. Mortgages, it's an area that we have an overweight in in our discretionary asset allocation models. Didn't really participate. So that one's a little bit disappointing, but by and large, a pretty good week last week in the fixed income markets.

Jeff Buchbinder (08:42):

Yeah, maybe fixed income like the lower oil and gas prices last week you see here. Yeah, crude down 4%, natural gas down almost 6%. And I was reminded today that you know, Europe has much more expensive natural gas than we have, right? In fact, over triple. Japan plays a lot more for natural gas too. So, you know, maybe U.S. exceptionalism is under attack a little bit if China's a little ahead in AI today. And it's not just that the model's more powerful, it's that it's cheaper and requires less power to train. That's what is, you know, disrupting the markets in the U.S. today. But our exceptionalism is partly also related to cheap gas and our energy efficiency, right? Our independence energy independence that we developed over the last 10, 15 years with the shale boom. So that's a really big deal, and can help us with the inflation problem and can help us keep rates down.

Jeff Buchbinder (09:46):

So beyond that I, you know, the dollar was weak last week because this includes, this morning's trading too, by the way. Because of the tariffs, right? If rates go up on fears that tariffs are inflationary, and if you're, you know, pricing in a trade war, you're probably going to have a higher dollar. Well, you got the opposite, that kind of, that trade kind of unwound. And then the yen of course got some support from the higher rates from the Bank of Japan. So here's the S&P 500 chart. Now this includes the sell-off today. And you see here, we still are holding the 50-day, and all these moving averages are trending higher. So we really haven't done technical damage today. We'll see if the sell-off continues after we get a little more information. But for now, the positive technical picture is intact.

Jeff Buchbinder (10:44):

Now, we've been saying for a while, and this probably won't change much today, we'd like to see more stocks participating. We'd like to see a higher percentage of stocks above the 200-day. Right now it's about 62%, so we'll keep watching that. But, you know, that sort of adds to the reasons to think we might get a little bit of a pullback. Obviously, we're getting it today. Could go a little bit further. We've been saying for a while that sentiment is stretched and we need to maybe cool off a bit. So, you know, this sort of AI news should you know, or is a catalyst certainly for the start of a sell-off. We're already seeing that today. There are other reasons why maybe it could continue a little bit longer. And by the way, that puts the January effect at risk because we're, you know, after today's trading, depending on how we close, but probably only be up 2% for the month. And you know, that means you just got a little less cushion to end the month positive. And remember, the stats historically are really compelling. If you have a positive January on average, your years are up 17. If you don't, you pretty much, you know, low single digits, I believe is the number. So that'd be something to watch too.

Jeff Buchbinder (12:02):

So the Mag Seven, of course a lot of AI in here. So I threw this chart in. Here, it's actually kind of the same story, a little worse, but kind of the same story that we're still in an uptrend, this group has been doing so well that you know, just one big down day doesn't necessarily break your positive momentum. So here again, we are barely holding the 50-day. And you know, we haven't quite broken down. The top panel is absolute prices, bottom panel's, relative strength. And you see here, even the relative strength line is still holding above recent highs. And you know, right on the 50-day, but maybe a tiny bit below it. So we still got a little bit of a cushion. And if you know, these markets, these stocks stabilize tomorrow, they're all different.

Jeff Buchbinder (12:52):

But if they stabilize tomorrow and throughout the week, the story, I don't think will be one of technical damage. It'll be one of just sort of hanging in there and passing a test. So we'll see how that goes. I think it's also worth noting you know, cheaper AI models are good for the U.S. economy, <laugh>, right? Not just good for China, because and less power requirement allows us to get to that productivity boom more cheaply. In fact, maybe that's why you're seeing shares of Meta up today. So just keep in mind, actually, Apple too, if the cost of this and the power of it levels up you know, we're just that much closer to actually getting the benefit of this. So it's not all negative. All right, let's go to bonds. And Lawrence, the 10-year is really close to breaking down here. What do you see on the 10-year chart and how do you think the economic data is affecting it?

Lawrence Gillum (13:51):

Yep. So we are around 4.53 as of now. So we have had a pretty decent rally since the middle of January. To your point earlier, January 15, 14, something like that was the most recent peak we hit around 4.80 on the 10-year Treasury yield. So you know, we're down, you know, almost 30 basis points over the past couple weeks. Along that same time period oil prices are down about 10%. So it's been a nice relief from oil prices, these inflationary pressures. The economic data has kind of been okay still. So we haven't seen the economic data fall off. Last week was a pretty light economic data week as well. This week's going to be a busy one, which we'll talk about later. But you know, this has really been kind of just a, I think an adjustment of less Treasury issuance you know, fewer tariffs or the tariffs scare behind us.

Lawrence Gillum (14:52):

So we'll have to see how the Treasury market reacts this week with GDP and PCE and all these other acronyms that are going to come to market this week. So but it's been a good run. Our view is that we still think we will end the year lower, 3.75 to 4.25 is our year-end target that we're, you know, a quarter of a percent away from kind of just getting that back into play. So you know, I still think that 4.80 was, you know, the recent top. I do think that we could probably retest that sometime this year just given the stronger economic data and just the, I mean, the deficit issues aren't going to go away right away. So I think that's going to be a headwind for long-term Treasury yields falling much from current levels. I, you know, I'm hoping DOGE and these other you know, things work out and we're able to reduce the deficits, certainly that'll help the Treasury market, but that's not going to be a first half of 2025 you know, solution. So I do think that over the course of the next five months, six months, we could retest that 4.80. But right now, I think it's you know, there's a nice tailwind to yields going on right now, though.

Jeff Buchbinder (16:13):

Yeah, I think it was a little easier for the leader of DOGE to cut costs at Twitter than it was, than it will be to cut costs for the federal government.

Lawrence Gillum (16:21):

Oh, for sure.

Jeff Buchbinder (16:22):

So though we're all rooting for the U.S. government to be more efficient and to you know, get closer to getting a fiscal house in order, that is a decades long project <laugh>. But hopefully over the next you know, year or two, we can start making some progress. And I think we'll see some of that progress later this year as we get into reconciliation and negotiating the extensions of the tax cuts and all that. So let's move along. So Lawrence, you did the Weekly Market Commentary today, which is available on lpl.com under the research tab. And it is about essentially the messages from the bond market about inflation or frankly, the economy, I would argue, in terms of the credit market. So let's walk through your charts here. What are the key takeaways?

Lawrence Gillum (17:14):

So we're all about market signals here on the Market Signals podcast.

Jeff Buchbinder (17:17):

Hey, how about that?

Lawrence Gillum (17:18):

So looking at a couple of the different market signals coming from the bond market, you know, I mentioned earlier that the 10-year Treasury yield is about a percent higher, despite the fact that the Fed started cutting rates back in September. That doesn't typically happen. You tend to see rates either stay long-term Treasury yields stay where they are or even fall. But the recent backup in Treasury yields, I think, has some folks concerned about the bond market expecting a resurgence of inflationary pressures. And that is not what we're seeing right now out of the fixed income market. So what we're showing here is the five- and 10-year inflation expectations. So market implied inflation expectations. And yes, those inflation expectations have increased recently, particularly since the Fed started cutting rates back in September. But we're not back to levels that would suggest markets are overly concerned about a second resurgence in inflation.

Lawrence Gillum (18:17):

I think the point I'm trying to make here is that we were in a very low inflation regime post-Global Financial Crisis up to pre-COVID. And you know, that was an era that was really characterized by low growth, low inflation, low interest rates. And, you know, as we get back to what I'm calling a more normal market environment, the normal market environment is pre-Global Financial Crisis, not pre-COVID. So you know, the markets I think are expecting inflation to stay around the Fed's 2% target, which is good news for the Fed because remember, in that low inflation regime the Fed and a lot of other officials were concerned about disinflation or even deflation and that was a bigger concern for markets and for Fed officials. So if we can get, you know, inflation back to around 2% pretty reliably, I think the Fed would take that and certainly the bond market would take that as well. So good news at least initially, despite the concerns about tariffs and you know, a pro-growth administration. Markets aren't the bond market anyway, isn't really concerned yet about inflation running away, like you know, it was earlier in the year or earlier you know, back in 2022.

Jeff Buchbinder (19:43):

Yeah, I mean, I guess we've had a little bit of an uptick, you know, that University of Michigan survey, a tiny bit of an uptick in inflation expectations lately, but we're ready to get some pretty good inflation numbers, right? The year over year comparisons get a lot tougher over the next several months. We've talked about this with Jeffrey Roach, right? Yeah. So you're going to get some pretty decent looking year over year inflation numbers over the next several months. And maybe that can, you know, help again anchor inflation expectations.

Lawrence Gillum (20:15):

Yeah, for no, for sure. We get the PCE data this week. I think, you know, the PCE data and the CPI, the Consumer Price Index, that those are, I mean, you're getting similar type stories about inflation may be plateauing for a little bit, but you know, the PCE data that we could get this week, I think should be a relief to fixed income markets. I think it's supposed to come in, you know, at a close to 2% on a year over year basis. So I think markets would welcome that. So it's just that CPI data and that lagging owner's equivalent rent component, which I'm sure Jeff has talked about as well. So but right now, it, I mean, the good news is that the bond market is not overly concerned about, you know, these additional Trump administration policies pushing inflationary pressures significantly higher from current levels. So that's good news for the Fed and for consumers.

Jeff Buchbinder (21:13):

Yeah. And you can look at that 2017, 2018 period when tariffs went in during Trump's first term, and there's not much, right? Little bit of an uptick, but it kind of stayed in its range Yeah. Actually, even lower than, you know, the period coming out of the financial crisis a few years earlier than that. So, yeah, maybe that market's realizing that too, and that's helping the markets deal with this. So you know, you just said Lawrence, that the market's not really that concerned with inflation. The market's not that concerned with this little bit of an uptick we've had in bankruptcies lately either, the spreads are tight,

Lawrence Gillum (21:54):

Spreads are tight. So we're looking at investment grade and high-yield corporate spreads so that, again, that additional compensation for owning riskier debt. Spreads remain at or near secular tights. So despite wars and inflation and maybe a pickup in some bankruptcies and defaults, the credit markets really haven't moved much. I mentioned today that even despite the equity markets selling off pretty significantly, spreads are wider by about, you know, five, seven basis points. So not really a big move higher in spreads despite what's going on in the equity markets. So, you know, we tend to look at the credit markets and they can act as this canary in the coal mine. Returns for credit markets are pretty asymmetric, meaning there's a lot of downside potential. Whereas, your upside scenario is you get your money back, plus some, you know, your coupon, so you can get really burnt by owning some of the riskier credits in the market.

Lawrence Gillum (22:49):

So we pay attention to those credits. They tend to be a, you know, a sell first ask questions later type market. And we just haven't seen that sell first type you know, scenario out of the credit markets. Now, I wrote in the Weekly Market Commentary that we do still have all in yields that are really attractive for a lot of institutional investors. You think about these pension funds, these other endowment funds that have, call it like a seven or 8% return target every year, where you can buy high-yield bonds, to a certain extent, but a lot of investment grade bonds and just hold the maturity and you get most of the way there to your return target without a lot of the volatility. So institutional investors have been playing a key role in keeping spreads tight.

Lawrence Gillum (23:36):

But you know, that said, we're just not seeing any sort of concern from the credit markets, from inflation or from bankruptcies. The spike that we saw in 2022 on that bluish line there, that really was a result of those inflationary pressures that peaked around 9% for the CPI. So you do tend to see a reaction out of credit markets when inflation is, you know, higher than expected. So, we haven't seen a move is another reason why bond markets anyway aren't concerned about a second leg up of these inflationary pressures.

Jeff Buchbinder (24:16):

Yeah, the regional banking crisis in early 2023 doesn't look like it had much of an effect either.

Lawrence Gillum (24:21):

Right.

Jeff Buchbinder (24:23):

So, yeah, pretty battle tested, I would say. And certainly this you know, AI sell-off is not going to spark concerns in the credit markets too much because, you know, who leads AI, it's the Mag Seven. Who has the strongest balance sheets with the most cash <laugh>, the you know, these companies don't need to borrow.

Lawrence Gillum (24:40):

What's amazing though is, I mean, Apple is a big issuer, NVIDIA is a big issuer in the market, but Apple just, you know, not a recommendation at all. But if you look at some of their debt, their debt is actually trading inside Treasury yields, so their yields are lower than the U.S. government because of their fortified balance sheets. And, you know, investors would rather own a two-year Apple paper than versus a two-year Treasury security. So, it, yeah, they're not impacting the credit markets from a negative perspective at all. Those are actually some of the reasons why spreads have remained tight because of those solid balance sheets.

Jeff Buchbinder (25:21):

Yeah. And again, there's a sort of second derivative effect of this AI news today, which is lower costs, right? Immediately the knee jerk reaction is sell-off because, you know, the demand opportunity is reduced for the big AI names in the U.S. because, you know, China might be a fiercer competitor than we had anticipated. Yeah. you know, if it slows down CapEx because there's more scrutiny on the returns of these investments, and maybe those returns aren't quite as good as market had thought, that's what we're going to sort out in the coming weeks. Sure, that's negative. But if you take the cost down and you make something more powerful for less for a lower price, you know, that's a win <laugh>. Yeah. So not for NVIDIA, maybe, but.

Lawrence Gillum (26:11):

What's interesting about that though, your comment is absolutely perfect, because what we're seeing in the fed funds market is the expectation of the Fed cutting because of the disinflationary impulse coming out of this DeepSeek release. So, you're absolutely right. So if costs do come down that means the inflationary dynamics are going to improve as well, which means the Fed can cut rates more than what was expected. So that's one of the reasons why we're getting a rally out of the rates market right now, is the expectation that the Fed can cut rates because of the fact that, you know, AI just got a little bit cheaper from this DeepSeek release.

Jeff Buchbinder (26:50):

Absolutely. Very interesting. So, yeah, when I came in, first logged on to my machine, it was 10-year yield down eight, nine basis points. So market recognizes pretty quickly. So last chart in your weekly commentary, Lawrence, I mean, I guess the, maybe the tagline here is TIPS are interesting.

Lawrence Gillum (27:10):

Yep. So, the takeaway, the "so what" is that bond markets aren't concerned about inflation, but if there are investors out there that are concerned about inflation shocks TIPS, Treasury Inflation-Protected Securities, are offering pretty attractive yields. So TIPS are Treasury securities that the principle it adjusts based upon the inflationary environment that you're in. So if inflation is above what markets are pricing in, your principle increases and you actually earn more than what your starting yield is. So right now TIPS are offering around two-ish percent inflation adjusted. So to kind of compare that to a nominal Treasury, for example, if a 10-year TIP security has a 2% yield, and you say, if you think inflation's going to be call it 3% over the next 10 years, the comparable would be, you know, the 5% nominal Treasury yield versus what you're getting out of TIPS plus your inflation assumption. So you know, we talked about the bond market, not really pricing in concerns about inflation, but markets can be wrong. So if you do want to have an inflation hedge in portfolios TIPS are pretty attractive right now, we think.

Jeff Buchbinder (28:28):

Very good. Yeah, overall still like bonds, still recommending fully invested fixed income in our portfolios and fully invested neutral on the equity side as well. So TIPS may be an interesting idea to put in there for those do it yourselfers out there. Let's turn our attention to earnings. So I mean, this is going to be a huge story this week too. We also get GDP and the Fed <laugh>, but and everybody's trying to figure out what this DeepSeek news means, but I think the key thing to keep in mind here with earnings is that there is a pretty big currency drag here that companies really didn't expect a few months ago. And so the upside we've seen that this far actually I think is pretty impressive. So titled this section, earnings objects may be better than they appear.

Jeff Buchbinder (29:19):

Kind of take off on what you see in your rear view mirror. And you know, we've gotten good upside. We've got already about a point. So we were kind of looking at high elevens consensus coming in. Now we're about, well, about 80 companies in, so about 16% of the S&P has reported and we're tracking to almost 13. 77% of companies have beaten bottom line targets. That is a good percentage. However, we've seen estimates come down about a half a percent since companies started reporting. So that doesn't sound great, but when you consider the currency effect in there, you know, it's about a point and a half, give or take on growth from the stronger dollar, and you consider all this trade uncertainty probably makes sense that companies would be a little bit cautious. And by the way, I know that Q1 guidance, so what you give in Q4 tends to be the most conservative.

Jeff Buchbinder (30:22):

So this is kind of a time to lower the bar so you can, you know, beat it for the year. So all those factors considered, these results are pretty good. We've seen, you know, great results out of financials. We talked about that last week when the banks reported two weeks ago. We've seen pretty good growth out of tech and communication services, which we expect to continue because of course, DeepSeek doesn't affect Q4 results. So all in all, you know, pretty good earnings season. Now, this week is a big week. We get four of the Mag Seven reporting. Hope I can list these off the top of my head. So it's we get Tesla, help me out here if I forget one, we get Meta, we get Microsoft and Apple. That's right. I think I got that right, NVIDIA's later.

Jeff Buchbinder (31:12):

It always is. Amazon's later next week and Alphabet's later next week. So you know that right there, just those seven names is about five points out of the 13. So that's a really big deal. But the rest of the market matters too, right? So that's the other eight points and you know, those companies can certainly chip in and we're going to get a lot of different companies this week. So, you know, we'll probably get more of the same, not a ton of upside, but modest upside as we predicted. And we'll get, you know, a little bit of currency drag. And then from these AI names, we're going to get questions over and over and over again about the China AI model. So yeah, anything to add to that, Lawrence, or should we go to the preview of the week?

Lawrence Gillum (32:02):

No, the earnings cycle is interesting because, correct me if I'm wrong, because I'm not, you know, an earnings person, but I think NVIDIA's earnings aren't for like another month, right?

Jeff Buchbinder (32:14):

That's right.

Lawrence Gillum (32:15):

So there's a lot of time between this DeepSeek release and you know, any perhaps commentary on or from NVIDIA. So it's exciting. I mean, I'm a fixed income person, so I like watching paint dry, but what's going on in the tech world is pretty exciting.

Jeff Buchbinder (32:34):

Yeah. How about that? Much more exciting than paint drying or grass growing or any of that stuff. So you're yeah, you can come on over to our side anytime, Lawrence, if you want a little more entertainment. So

Lawrence Gillum (32:46):

I don't know if I can handle that, but we'll see.

Jeff Buchbinder (32:49):

Yeah, well, I have an earthquake today, you know, so may maybe I can handle volatility more, more than most, thankfully not big enough to do much damage, although it originated out of Maine. So I haven't seen news on any impact in Maine, but, you know, if it's an under four, it's probably not going to do much if any damage. Thankfully we've had enough weather disasters as you alluded to. So let's preview the week ahead with, in terms of the economic calendar and the central bank calendar, we kind of already previewed earnings, but I would point out that we get about a hundred companies from the S&P 500 reporting. It's not just the Mag Four or whatever you want to call them. Fabulous Four. It's you know, companies all over the place. And that right there, I think it's, well, it's 20% of the S&P 500 this week, but it's over 30% of the earnings that are reporting this week. So really, really important week for earnings. What else should people be watching Lawrence?

Lawrence Gillum (33:51):

Yeah, here in the U.S. it's Fed Week, so it's probably, I may jinx myself here, but it probably won't be as exciting as the December meeting. The December meeting, remember we got this hawkish rate cut where the Fed cut rates by 25 basis points, but then said, you know, pretty much that was going to be it for a while. Very low expectations coming into this Fed meeting that's on Wednesday when we get their decision, only about a 0.5% chance of a rate cut. So market expectations are pretty low. So hopefully this is a you know, a pretty, you know, calm market environment after the meeting. The one thing that I'll be paying attention to though is that we haven't really talked about quantitative tightening or balance sheet runoff. So maybe this is a meeting where they provide some additional commentary on that. But again, hopefully this is going to be a pretty quiet Fed week which isn't always the case. We also have the ECB and the Bank of Canada this week where they're both expected to cut. So we're going to continue to see that divergence between central banks outside the U.S. and, and the U.S. So there could be some impact in the currency markets but hopefully you know, relatively quiet elsewhere.

Jeff Buchbinder (35:14):

Yeah, we've been talking about how the ECB is going to cut while the Fed kind of waits for a while. And that probably is part of why European equity markets have done better lately. I mean, that's not enough. You need more. And frankly, we might be getting more, maybe the market is pricing out tariff risk in Europe as it, you know, pertains to the U.S. and the Trump administration. Those markets are breaking out to new highs. So that's, I'm glad you pointed that out, Lawrence. We'll certainly watch the ECB and watch expectations because they don't really have a, maybe the U.K. does, but they don't have really have a rates problem so much anymore. They don't really have a big inflation problem so much anymore because you don't really have the growth over there to spark inflation like, like you have over here. So anything else to add on the week ahead or did you cover it?

Lawrence Gillum (36:12):

Well, I mean, the other thing that you have highlighted is, is PCE, you have your headline and your core. Oh yeah, yeah. Still around two something. So that's big number. You're probably not going to move the needle in terms of market expectations. I think it's pretty well you know, priced in at this point where we're kind we're going to be at these, we think at these kind of levels for, you know, for a couple more months before we see progress towards the end of the year. I think that's what I think Jeff had low twos at the end of this year and then two into 2026. So it's, you know, unfortunately it's not going to be a problem solved right away. But if the bond market is correct you know, we shouldn't expect a second resurgence in inflationary pressures, prices. So, we're, we still think we're going to get back down to that 2% target eventually, perhaps early next year. Yeah.

Jeff Buchbinder (37:09):

So if you get frustrated watching the kind of stubborn PCE inflation data, just switch over and watch CPI because CPI is actually going to show some nice improvement over the next several months on a year over year basis because of the base effects. So yeah, better inflation data there. It won't be the end all be all for the Fed, but it'll help a little bit on the margin with markets. So, yeah, good. Maybe better news to come there. So thanks for that Lawrence. You know, we got a lot to pay attention to <laugh> this week, needless to say, it's one of the busier economic calendars and central bank calendars that you'll ever see. And then on top of that, you've got earnings and we all got to figure out what DeepSeek means. So that probably be one of our main topics for the podcast next. So, so thanks Lawrence for jumping on. Really good stuff on the bond market. Glad that the bond market's offering us some reassurance that we can point to that you know, on what is a challenging day for the equity markets here on Monday. Everybody have a wonderful week and thanks for listening to another LPL Market Signals. We'll see you next time. Take care. Bye.

 

In the latest Market Signals podcast, LPL Research’s Chief Equity Strategist Jeffrey Buchbinder and Chief Fixed Income Strategist Lawrence Gillum, provide some perspective on the DeepSeek-driven market selloff, share some reassuring messages from the bond market, and preview a very busy week of economic data, central bank announcements and earnings reports.

Stocks produced solid gains last week on a more benign outlook for tariffs, lower yields, and artificial intelligence (AI) enthusiasm, although concerns that China’s entrant in the AI race might be a more formidable competitor than previously believed drove stocks down sharply in Monday’s trading.

Next, the strategists examined the messaging coming from the bond market. Despite an increase in Treasury yields lately, the bond market is expecting inflationary pressures to be higher than the low inflation regime experienced pre-COVID-19, but inflation expectations are not necessarily unanchored, which is good news for the Fed. And examining what markets are pricing in for inflation risks, inflation reigniting is only contributing roughly a third of the move higher in interest rates with non-inflationary reasons contributing the rest.

The strategists also provided a brief update on earnings season. Results have been solid thus far despite limited upside considering stiff headwinds from a strong U.S. dollar and tariff uncertainty.

The strategists close with a preview of the week ahead including key economic and inflation data, central bank meetings in the U.S. and Europe, and earnings reports from more than 100 S&P 500 companies. 

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