This Week is Focused 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 this is September 23. The market's trying to make up its mind as I do this call as to which direction we're headed today, but we had a really strong performance right after the Fed announcement of 50 basis points. The follow through, by the way, the next day was strong and then we entered kind of down kind of flat. But nonetheless, Chairman Powell did everything in his power to try to convince the market that the reason for the 50 basis points, that rather than 25, had more to do with inflation coming down at an acceptable pace rather than that the Fed had concerns over the labor market. Remember the Fed is a dual mandate central bank and the labor market comes under the heading of maximum employment.

Quincy Krosby:

But Chairman Powell himself has been invoking the labor market mandate, maximum employment, more times than not as inflation has been coming down. But nonetheless, inflation isn't down to the level I think, but many believe the Fed has not quelled inflation enough to declare victory. And in essence, if you're coming down 50 basis points and you're saying it has to do with inflation coming down at a faster clip, you are in essence declaring victory. Although he did say, he said, look, we still remain data dependent. When a reporter asked Chairman Powell about July 31, and the reason that was raised is that several members of the Fed on July 31, this is the meeting before this last meeting, had suggested that maybe it would be a good idea to cut rates then, but it had to do with concerns over the labor market. Chairman Powell did not move in that direction in answering, he didn't touch the labor market.

Quincy Krosby:

His answer was interesting. He said, well, we would've cut rates but we didn't see the CPI report the Consumer Price Index report. He said that came out afterwards and we would've cut rates because we saw how inflation was coming down at a steady pace. In other words, they want the market to believe in no uncertain terms. This is not an emergency cut having to do with the weaker economy with the labor market. It was because inflation is coming down at a pace that does not warrant having the higher for longer monetary policy intact. Though in any event, right now what the market is focused on is the economic data releases because we will see whether or not the economy is as solid as Chairman Powell suggested. And we also have this week the Personal Consumption Expenditures Index, the PCE, the Fed's preferred level for inflation to see whether or not it is still actually coming down.

Quincy Krosby:

Now, I do want to add here and not get too wonky on this call, but the Fed was really in conjunction with what the two-year Treasury yield had been telling us all along, that the Fed would come down 50 basis points. If you were watching the two-year. Remember the two-year Treasury yield is a basically a snapshot of where a monetary policy is headed. The 10-year is much more, has more noise around it if you will. But the Fed came right in line with what the two-year was basically projecting. I just want to point that out. But this week we will have the, as I said, we will have the Personal Consumption Expenditures Index report on Friday and that's going to give us an idea of whether or not inflation continues to come down at a faster clip. Now keep in mind when we look at the CPI, you've got oil in there, you've got food. Oil prices are coming down, food prices are actually coming down, now are they coming down fast enough?

Quincy Krosby:

That remains to be seen, but the trajectory is downward. The other thing that we have to remember about the reports, anything to do with inflation, is that the rental equivalent, the part of the reports that look at that, look at rent contracts, leases, that is having a more difficult time indicating that the numbers are coming down. And the reason is quite simple. You know, some people sign a rental form for two years, some sign it for three years. You have to wait until the new ones are actually being produced and to see are higher prices actually starting to come down? And again, given the size of our country, you're going to have different regions, different regions and regions within larger regions suggesting higher rental prices are lower. I would also add here that if you had an economy slowing and slowing dramatically due to layoffs, what typically happens is that regions, rather than wanting people to just break their leases and leave because they lost their jobs, many times the landlords will work in order to keep someone in a property and then cut.

Quincy Krosby:

But again, the country is so large that you're never going to have one overall rents going up or rents going down unless you had a national recession. And you know, the unemployment rate skyrockets, which we do not have. Chairman Powell made the point that the economy is solid. But I do want to add here that in the statement it made it very clear that the labor market is slowing. The last time we had the report before this last meeting, it said it was, I think the term was used, it was moderating. So again, Chairman Powell basically made it perfectly clear that's not why we cut rates and looks as if the market has accepted that. Because remember the market did not want rate cuts coming if it was commensurate with fear that the Fed may have, that the economy was slowing much too quickly and that the labor market was deteriorating at a faster pace.

Quincy Krosby:

And I do want to add here, because obviously given how close this is to the election, there have been comments from both sides of the aisle, by the way, about that this is actually a reflection of a weaker economy. Democratic senator from Massachusetts added after the 50 basis point cut. She said, you see this does show that the Fed was behind the curve, meaning behind the curve in terms of how the economy was going. And then of course, Republicans on the other side of the, I will say, you know, it shows you that the economy is much weaker than anybody suggested. So it's interesting that both sides of the aisle have commentary about this 50 basis points. So this week we are going to have Michelle Bowman. She's a Federal Reserve governor. She does not represent one of the Federal Reserve banks. She is going to speak a couple of times.

Quincy Krosby:

And why is that important? It's important because she was the lone dissenter. Her view was, hey, we have not quelled inflation. Inflation is still in the system. We should have only had 25 basis points. We want to hear what she has to say. And according to the schedule for Fedspeak, she will be speaking tomorrow on Tuesday, but she will also be speaking toward the end of the week. Now, a Republican in the Fed, this is Christopher Waller. Christopher Waller, made the comment that inflation has been coming down at an acceptable pace that actually called for 50 basis point cut, that we didn't need to be higher for longer based on where inflation has been heading. And last but not least, for those on the call, keep in mind the Fed does not wait until inflation reaches 2% before they cut. No, they don't. By then it would be much too late.

Quincy Krosby:

And if you kept it higher for longer, it would be really difficult for the economy. So they pay attention to the trajectory, the path of the inflation. And so Christopher Waller, again a Republican and if you check in the news, you'll see his name has been touted perhaps to replace Powell when Powell is finished in 2026, when his term is completed. So in any event, let's look at this week, we are going to get pending home sales again, but we're going to have personal income and personal spending on Friday. And also the Personal Consumption Expenditures Index, the PCE. Expectations are. By the way, that year over year, that's important, year over year, it will come down, it will be lower than the last number and it could reach perhaps 2.2%, which would be awfully close to the Fed's target. Also, we're going to have consumer sentiment, a final number for consumer sentiment.

Quincy Krosby:

And I do want to add that the consumer sentiment surveys, number of them have actually been ticking higher. I'm not saying that they are off the charts higher, but they're trending higher. That's what we look for. We look for, in essence, less bad. I know that doesn't sound scientific because it isn't. But what you look for is the data or the survey numbers start bottoming out and so we'll be paying attention to whether or not on Friday, 10:00 in morning, the University of Michigan, that we do see that the number ticks up even at the margin that it ticks up just a bit. Now, certainly lower gasoline prices do help consumer sentiment and also the labor market obviously is incredibly important. We will also get pending home sales. The expectations are that we actually will see a positive read on that. It had come down 5.5% in the last report.

Quincy Krosby:

The expectations are it will be up modestly. But overall, the market is really focused on that PCE report, again, to ensure that the market believes that the Fed was correct in its rationale for why they went 50 basis points. Also on Thursday, we are going to have the durable goods numbers. Now let's keep in mind that one of the things that we're looking for and by the way, the expectations are it will be negative. We are looking to see what companies are doing embedded in that durable goods order report. You will see there'll be a part, a component that has to do with capital expenditures. We'll be looking to see if that is up. The one issue for the market has to do with transportation and whether or not what the sales were there. Also, we will get another revision.

Quincy Krosby:

This will be the second revision for GDP. This is for the second quarter. And expectations are that it will come in at not 3%, but at 2.9%, which certainly is a solid resilient underpinning for the U.S. economy. So again, quite a bit actually of Fedspeak this week. We want to hear what the Federal Reserve speakers have to say, but I am going to be paying attention to Michelle Bowman, Federal Reserve Governor Bowman, and hear what she has to say about why. We know why, she just thought that inflation had no victory lap yet, but what she sees coming up and it'll be important. So the market has an awful lot to pay attention to. And overall, because the Fed paid so much attention to basically that the economy is solid, that inflation is coming down, we want to see the market's reaction to all of the data, but we know this week it will be the durable goods, it will be the Personal Consumption. And I also believe that we're going to be paying and talking about the personal income and personal spending because after all, the consumer remains the biggest portion of this economy. 68% of GDP comes from consumer spending. So we'll be paying attention to personal spending and that comes out on Friday morning. Have a very good week. Thank you very much for listening. We'll be back next week. Thank you.

Quincy Krosby:

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Quincy Krosby:

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