Market Focus Is NVIDIA, PCE Inflation and 25 or 50 Basis Points

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 this is Monday morning, August 26. The markets at this point, well before the market opens, looks like it's poised for a positive opening. There's an awful lot for the market to digest. First of all, the market received last Friday at the Jackson Hole, Wyoming Conference from Chair Powell to the market, but overall to the economy, to the global economy, to U.S. consumers, for example. They are cutting rates. He made it as clear as possible and the next meeting for the Federal Reserve is September 18. The expectations are that the Fed is going to cut rates by one quarter of a percent, 25 basis points. However, increasingly there's talk of the Fed perhaps coming in with 50 basis points. Now, this is going to be debated until we get to that meeting.

Quincy Krosby:

However, keep in mind, we have a payroll report due that is going to be coming out on September 6, and that is going to be important for the market because the Fed Chairman Powell himself, made it clear. Fed is now focused on the labor market. He said it about as clearly as you can get. He said, inflation is coming down. We are now focused on the labor market. Now he said, we don't want the labor market cooling anymore, meaning we don't want it, you know, weakening anymore, softening anymore. So this is why the market has now been discussing whether or not 50 basis points could be what the Fed will do. Now a lot is going to depend on the payroll numbers. We're going to have a payroll report on September 6, the first Friday of the month, and a lot will depend on how that unfolds. Remember also that he made it clear that the rise in unemployment numbers, right, he said it's still healthy.

Quincy Krosby:

Well, of course it is. What the market has been paying attention to, however, is how quickly the unemployment rate is inching higher. As it stands, 4.3% unemployment. Yes, it is healthy, but the market understands that there is a pattern, and that pattern is that that unemployment rate can click higher at a faster pace because history has shown that that very often can happen. Now, he also said that the reason that that is happening, that the unemployment rate is rising has to do with labor participation increasing. So remember that is another survey that the Bureau of Labor Statistics will mention. It is the participation rate. How many people are coming in and looking for jobs, how many are not getting those jobs? So when that happens, the unemployment rate ticks higher, but that's what he attributed to. Not that there are tremendous layoffs. Not that, you know, companies are warning and so on, but that so many people are coming in to the labor market looking for jobs.

Quincy Krosby:

However, he pointed out the vacancy rate is coming down and so it's more difficult for those folks to find jobs and therefore the unemployment rate ticks higher. Nonetheless, the market is looking at this and saying, hmm... Interesting. If we see the unemployment rate tick higher, the next report labor market report, perhaps the Fed will have a different view. Or if between now and then, the Fed meeting, we see the initial unemployment claims ticking higher. They've actually steadied a bit, but we are seeing continuing claims ticking a bit higher again, as folks are having trouble finding a new job after they've been laid off. This will be interesting to see what transpires between now and the Federal Reserve meeting on September 18. We're going to have fedspeakers this week. We will pay attention to what they have to say about the labor market because again, that seems to be the focus today.

Quincy Krosby:

However, we're going to hear from durable goods this morning, and right now it looks as if the durable goods numbers are going to be in positive territory as opposed to the decline we saw last month. So this will be for the July numbers and the expectations are again that it will surprise to the upside. In addition, this week we are going to have consumer confidence. Expectations are, we could see a tick a little bit higher, but remember what consumers have been saying is they are worried about their jobs. They're worried about being able to get new jobs if they get laid off. This has been a steady theme in so many of these reports and we saw that last week the New York Fed came out with a survey and that survey suggested that Americans are worried about the stability of keeping their jobs that they have and if they're laid off, can they get a new job.

Quincy Krosby:

So we're going to see how the consumer confidence reports actually start to show whether or not there's a pickup in confidence or whether or not it continues to decelerate. In addition, this week above all else is going to be the PCE report that comes in on Friday. This is the Personal Consumption Expenditures Index, the Fed's preferred view of yes, of inflation. Here, the expectations are that with year over year PCE, the core or the super core, that it could tick up just a tiny bit. Not enough to shake the Fed's concerns about inflation coming down at an acceptable pace, but nonetheless that it could tick up just a bit. You know, more and more we're looking at the decimal. So if it's 2.6, we're looking, could it be 2.7, which is really just a tad higher. But remember, Chairman Powell mentioned he is not as concerned about inflation.

Quincy Krosby:

He believes it is coming down at an acceptable pace. Also, this week we have more on pending home sales. Expectations are that that will actually be lower than the last read. But nonetheless, we're having the market tell us that with the expectation for rates to come down, that folks are saying, well, we, we could go in and and look for houses before the Fed actually cuts rates. This is an important issue for the market to begin to adjust to what the Fed suggests, telegraphs to the market versus actually what they do on the set day. That we're seeing that consumers are reacting more and more to the telegraphing from the market as opposed to the actual say, rate cut that they're going in. And this, this is a whole other subject for study because there are those who believe that it doesn't take 7, 8, 9, 10 months for the effect to take hold, but rather a shorter time given the transparency coming from Federal Reserve speakers and Chair Powell himself.

Quincy Krosby:

So it'll be interesting to see. Now remember these numbers look backwards, but looking ahead, we're going to see whether or not folks go in and suggest, well, you know what? We know rates are going to come down. Let's go in and take advantage of the market as it is before prices perhaps go higher. Historically, when rates come down and mortgage rates come down, historically the prices go up. That has defied history, by the way, in that prices have stayed high. But nonetheless, those houses which have been sitting on the market for a little bit longer than expectations may find that they have buyers now, as the market understands the Fed is cutting rates. We are also this week going to have the revision. It sounds like ancient history now of the second quarter GDP. Expectations are that it stays at 2.8%, doesn't move in one direction or another.

Quincy Krosby:

I want to mention however, that expectations for GDP now, right now in this quarter where we are, are that we are below 2%. How much? We don't know. But right now, unless there is a major shift, positive shift in the data, we are expecting the GDP for the third quarter to be a bit lower than 2%. Also this week, again, roster of fedspeakers, but the market is paying very close attention to what we hear from the NVIDIA report, which is coming out on the 28, after the market close. This is going to be extremely important because Nvidia, as you know, is a market mover in one direction or another. The expectations are, and that's consensus estimates, is that they will have a strong earnings report. The question will be about their guidance. Remember they actually had a glitch in terms of whether or not they can support one of their orders for a new chip.

Quincy Krosby:

Market's going to want to know about that, whether or not it's been resolved, whether or not they expect any other problems. Also, the question will be what do they perceive in the coming months for new orders? Because we saw during the earning season that many of the companies, the big mega tech companies, are spending quite a bit of their budgets towards bringing in more and more of AI infrastructure. And the question for the market has been, okay, that's fine, but what are you doing with it? How is it helping your operating systems? How is it being monetized? So all of this is going to be interesting, especially during the call with the analyst and hearing what the CEO has to say and very, very important. Now I'm going to look in the opposite direction from mega, mega Nvidia. Yes, Best Buy. How important is Best Buy? They're coming in on Thursday, on the 29, and the reason I'm looking at what Best Buy has to say is that we've seen that they have cut their prices, they have reconfigured their stores by the way, and they have been focusing on back to school sales, whether it's for, you know, college students with devices that they need or high school students, and for that matter, some of the younger kids who are being told they need to have sort of upgraded devices. They put those on sale. They've hired people or move people over, salespeople over into that area so that they could be there for the back to school sales.

Quincy Krosby:

That's going to be important because all of these big box stores have been cutting prices and we saw last week that the discounters have been doing well, whereas the walk into the mall stores have had more difficulty. So let's see if these discounts have worked and whether or not they've seen back to school sales picking up, and this will be coming from Best Buy. Kind of the opposite from what we always look for from the big tech names, especially Nvidia. So I look at that because we're looking at U.S. consumers. How are they spending? We know that we are spending, but it is careful, very much focused on what they need and that is going to be important. Again, perhaps what we hear from Best Buy overall, this market in terms of earnings for the second quarter earning season has actually on a year over year basis on the earnings per share showed us gains.

Quincy Krosby:

And this is important because there were questions as to whether or not the second quarter was going to hold up. 70.7% of the companies that have reported, which is, you know, majority have reported stronger year over year. Earnings per share gains very important as we go into the next quarter earnings. This is, I think, a testament to the strength of the companies that have come through. They are managing that bottom line and it is extremely important when you have a market that looks as if it wants to move perhaps even higher. Also, what we're paying very close attention to is the price of oil. The reason for that, it's clear, it's the Middle East. Right now as I do this call, the crude oil is below in terms of West Texas intermediate, below $80 a barrel. It looks as if it's resting there on the back of news that apparently Israel, Iran, and Hezbollah, all of them suggesting that perhaps we've done enough right now to make sure that the other side knows that we mean business. That there may be a little bit of a respite in what we see coming out of the Middle East, but we're keeping our eye on it because if it changes, one of the most important catalysts for any kind of incursion, deeper incursion, into the oil producing region is going to be that oil prices are going to move up higher than what we're seeing right now.

Quincy Krosby:

But I do want to report that because it is very much being watched by the market. Last but not least, in terms of August buyback, share buybacks, one of the things that we have actually seen is that companies went in when the market sold off so much based on, you know, concerns about the employment landscape in the U.S., concerns about the unwinding of the yen carry trade, and we saw tremendous amount of share buybacks happening. However, the announcements for share buybacks from the earning season is actually a record and that helps, does help the market. There is no doubt about it, and so far in terms of hearing from the politicians is they're not going to touch that at least right now because that has always been a sore spot for many politicians saying, why are we rewarding share buybacks? They shouldn't even be allowed. Nonetheless, they have been moving and they have been actually helping the market as they always do.

Quincy Krosby:

We don't know where it's going to go as we get deeper into the election season. But nonetheless, a record announcement of share buybacks in the month of August. So a lot for the market to deal with this week. And again, headline, Personal Consumption Expenditures, PCE, extremely important. Also extremely important is Nvidia. And I would also mention here, let's listen to what the Fed speakers have to say. Following Chair Powell's message on Friday morning from Jackson Hole, rate cuts are coming. The movement right now on the market is, is it going to be 25 basis points or 50? A lot depends on the labor market. Have a very good week. We'll be back next week. Thank you.

Quincy Krosby:

This material was prepared by LPL Financial. It's for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views of strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principle. Any economic forecast set forth in the podcast may not develop as predicted and are subject to change. References to markets, asset classes and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance reference is historical and is no guarantee of future results. All information referenced in the podcast is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy.

Quincy Krosby:

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker dealer member RA and SIPC ensure its products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, that is not an LPL affiliate. Please know LPL makes no representation with respect to such entity. If your financial professional is located at a bank or credit union, please note that the bank or credit union is not registered as a broker dealer or investment advisor. Registered representatives of LPL may also be employees of the bank or credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of the Bank of Credit. Union. Securities and insurance offered through LPL or its affiliates are not insured by the FDIC or N-C-U-I-A or any other government agency, not bank or credit union, guaranteed not bank or credit union deposits or obligations and may lose value.