Market Reaction to the Dollar, Fed Minutes and PCE Data

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 Monday morning, November 25. Thank you so much for joining me on this Thanksgiving week. The market is poised this Monday morning, poised for a strong open. The Treasury yields have inched lower, and the U.S. dollar has inched lower vis-a-vis the basket of currencies the dollar trades against. Why is this important? It's important because when the Treasury yields inch lower, as opposed to climbing higher, actually it does help the equity market. We all know how the equity market will be very much focused on certain levels and the level that the equity market, stock market, is looking at is if that 10-year Treasury yield is going closer and closer to 4.5%. The fact of the matter is that probably, if that were the case, you'd probably see buying come in.

Quincy Krosby:

Why? In order to grab that yield. But let's take that out the equation for a minute, because once you get to one level, then the market starts looking at the next level, and the stock market is, you know, very much focused on this. However, what changed the calculus, even for today's market? It is the announcement of the nomination for the head of the Treasury Department and this nomination, Mr. Bessent, he is someone who is seen as more, perhaps more hawkish and more in tune with the capital markets, including currencies, including every aspect actually, of capital markets. He has tremendous experience and the market you can see is actually applauding. You see the, again, the yields coming down, the dollar also easing a bit, and also the equity market futures higher. This is the way the market applauds an announcement such as the next Secretary of the Treasury.

Quincy Krosby:

Keep in mind how important that particular position is in our country, for our country, given the amount of debt that is going to have to come into the market and be auctioned off, and also again about the dollar. Now, I just want to go over yet one more time, contact me if you need, you know, to have a conversation. But the reason the dollar has been climbing so dramatically is that the currency market says it's too, you know, itself, so to speak, if it could speak, says, well wait a minute, you know, inflation is kind of sticky. Yes, we know that from the CPI and this week, by the way, everyone, we are going to get the Personal Consumption Expenditures Index, the PCE, on Wednesday, along with a batch of other data, but that's going to be the one that stands out. And that suggests that the market, the consensus is that they're going to see inflation a bit stickier.

Quincy Krosby:

But let's hold that for a minute. The other concern is that perhaps even at the margin that the tariffs could increase inflation by raising prices for the consumer. And that's how it works. So even, just a little bit that right now the market is worried that perhaps you can see inflation climbing higher because of the introduction of heavy tariffs, not just, you know, there are always tariffs. By the way, countries always have some tariffs. If you look and want to find out, there are always tariffs in place. However, the expectations have been that President-elect Trump may impose higher tariffs, tariffs that are punishing, and then you get retaliation. And that combination adds to ultimately prices that are passed along to the consumer. So the reason for the dollar climbing higher is the notion that at that point at which the market has more information about what is going to happen, that the Federal Reserve cannot lower rates.

Quincy Krosby:

What the market wants is to see the Fed continuing to lower rates. But here's the point. The dollar has been focused on, well, where is all of this going? Because if the Fed says, hey, we've got to be higher for longer, the dollar is going to be higher for longer, right? And then if I drill down, what happens is multinationals 30 to 40% of the S&P 500 exports and a stronger dollar does hurt them. And I will remind everyone on this call that back in the summer of 2022, when the dollar rose and rose actually on a steady, steady path you had the, you know, Fed starting to talk about raising rates and they raised rates in the spring. You also had, in the spring you had the Ukraine-Russian conflict beginning, the dollar rose. And in that summer of 2022, during the earnings season, many of the exporters, the big exporters complaining about it, even Microsoft for example, said, this is hindering our sales.

Quincy Krosby:

How are we going to be competitive? So we have to keep this in mind, that what we want to see is the dollar ease, ease on the back of an expectation that perhaps we're not going to see this heavy barrage of tariffs and the retaliatory effect of that. So that may not be the case, but right now, today, this is what the market is seeing because I am seeing the dollar ease, I'm seeing the 10-year Treasury will come down and I'm seeing the market saying, hey, this announcement for the new secretary of the treasury is good news. So, let's look at that and maybe the market changes this mind about that. But right now, this morning, that is what we're seeing. This week, I want to point out something else. Volume in the market, the trading volume, tends to ease a bit in these, these holiday weeks.

Quincy Krosby:

People go on vacation, not just here, by the way, on trading desks overseas that just focus on the U.S. market, they will tend to take a holiday as well. So trading overall. So volume and liquidity in the market just sort of ease a bit. Now what happens is, when you have a scenario like that in the market, any good news that comes out and what would the good news be? I'll just give you an example. How about if the inflation report on the PCE comes out and it is lower than consensus estimates. That core year over year or just year over year actually comes down, that could push the market up significantly, almost more than you would expect. Conversely, if the report suggests inflation is higher than what we have in the consensus estimates, the market come down in a much stronger way.

Quincy Krosby:

In other words, it can skew the market and the market reaction to headlines, simply because you don't have as much trading in the market and liquidity tends to be lighter. So I want to point that out. We always say that even in terms of currencies, I've seen times where the news comes out and you get this huge hike in the dollar or the opposite, and then once people come back to work and everything is back to normal, it levels out. So please, let's keep that in mind. But nonetheless, again, I want to report this, the market is showing us every indication that it applauds this nomination, which is extremely important given the importance of the Treasury Department, especially in this environment. This week, also, again, we're going to have the Fed minutes come out, we're going to have the Personal Consumption Expenditures Index come out.

Quincy Krosby:

All of this by the way, is going to be on Wednesday afternoon. We're going to have actually the gross domestic product revision, the first revision, GDP, for the third quarter, right? And you know, I want to just make this real clear, the market is looking at the fourth quarter where we're right now and what the expectations are. But nonetheless, all of this together will, you know, the market will absorb the information and the expectations are right now that the first revision of third quarter GDP will remain where it was at 2.8%, which is actually quite strong. And remember it's the third quarter. So again, we're going to get the minutes coming out and that will be on tomorrow, on Tuesday. And then on Wednesday is all of the data and the market really, I just want to point this out, is going to be focused on the PCE Personal Consumption Expenditures Index.

Quincy Krosby:

And again, some of those data, that embedded the components, actually indicate that the market believes, the consensus estimates is that we are going to see a tick up in inflation and we'll see how the market deals with it. So far the market has been accepting it as long as it isn't higher than consensus estimates. Now remember if it's lower, oh, this market is going to be applauding even more. We'll also have personal income and personal spending and we will have durable goods. But I do want to add this, and this also is going to follow what comes out this week, and that is expectations for the December meeting of the Fed and whether or not after the PCE comes out, does that change and in which direction does it change? Right now the market is looking at a lower expectation for a rate cut at the December meeting.

Quincy Krosby:

Now again, this could change and it's right now a toss-up. It's almost, I would have to say it's a little bit more than 50/50 that the Fed cuts rates, but it's really close. But this report this week is going to change that, and you'll see whether or not the market believes the Fed is going to cut rates again, or does the market believe the Fed is going to pause? And that's important because a pause is just that. And what happens when the Fed pauses or any central bank pauses, it actually is explained in a way. We just want more information. It doesn't say to the market, hey, we're finished with cutting rates. No, it just says, we're just going to stop for a bit and we're going to wait for more information. So that would be a pause. The market actually does think the Fed could pause and just say, we want more information.

Quincy Krosby:

And again, I just can't stress this enough. The Personal Consumption Expenditures Index report, the PCE, Fed's preferred measure of inflation is going to affect what the market thinks. And we will probably see it either go up or go down in terms of the fed funds futures market. And it's going to be important because there's a lot riding on all of this. And this is why all of this is important for the market and also for consumers, by the way, it's very, very important. And with regard to consumers, you know, what's particularly interesting about the data that we've seen is that consumers continue to spend money, but carefully and the higher income consumers are going out and spending obviously more money. We see it, for example, in some of the reports from the higher end consumer products group. And I think I talked about this and that would've been Williams-Sonoma, that saw money coming in.

Quincy Krosby:

It was almost pretty astounding that consumers are spending there. What did Walmart tell us? They told us, again, I'm repeating this, that those who have income of over a hundred thousand dollars a household, they are spending more Walmart and, and not just buying food, which is a low margin item for Walmart, but going into the more discretionary lanes in the sections in Walmart. And that also suggests, again, that consumers, while being careful, but those who are able to spend are spending. Now that doesn't talk about delinquencies picking up in auto loans, late payments in credit cards, lower income Americans are still having trouble paying on time overall. So there's quite a bit kind of conflicting data, shall I put it that way, which is not you know, unusual particularly at certain points for the market. I also want to mention the tech sector right now before we close.

Quincy Krosby:

NVIDIA had very good numbers. I mean, there's no doubt about it, but as you can see, the market is saying, well, that's great, that's great, but how about more? We want more. And what's typically happened with NVIDIA over the last year, I would have to say, well, we've paid so much closer attention to AI, is that during the course of the quarter, you'll hear more from them. You'll hear more, for example, every month we wait for Taiwan Semiconductor, right? Remember they do the manufacturing, for example, for NVIDIA, just to give you an example. They will give a general idea of their position of whether or not they're seeing new orders. And then by implication, all of the companies, such as NVIDIA, that provide the infrastructure for the technology sector, it tends to permeate and into the providers, the infrastructure providers, of which NVIDIA is one of the largest.

Quincy Krosby:

So we'll be paying attention next week and the week after with regard to all of this together. But in closing, I want to wish everyone a Happy Thanksgiving. Thank you for listening. And also this morning's market should give us all a nice deep breath because the market is very, very pleased with the President-elect's choice for the Treasury Department. Again, one of the most important departments in our country, particularly at a point where we have to start dealing with the deficit and the budget. So I'm grateful. I'm grateful for that. I'm grateful for all of you listening. Have a wonderful Thanksgiving. Thanks so much. Bye-Bye.

Speaker 2:

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Speaker 2:

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