What the 'Fast Money' traders make of September CPI, earnings week

Key Concepts

• Owner's Equivalent Rent (OER): A component of the Consumer Price Index (CPI) that measures the change in the cost of housing services for renters.
• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• Earnings Per Share (EPS) Growth: A measure of a company's profitability, calculated by dividing net income by the number of outstanding shares.
• Federal Reserve (Fed): The central bank of the United States, responsible for monetary policy.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• "Dovish" Stance: A monetary policy stance characterized by a preference for lower interest rates and accommodative monetary policy to stimulate economic growth.
• "Hawkish" Stance: A monetary policy stance characterized by a preference for higher interest rates to control inflation.
• Animal Spirits: A term coined by John Maynard Keynes to describe the instincts, emotions, and confidence that influence economic decision-making.
• Buy the Dip Mentality: An investment strategy where investors purchase assets that have recently declined in price, expecting them to rebound.
• Services PMI (Purchasing Managers' Index): An economic indicator that measures the activity level of the services sector.
• Michigan Consumer Sentiment Index: A survey that measures consumer confidence in the economy.
• Semiconductors: Electronic components that are essential for modern technology, including computers and smartphones.
• NASDAQ: A global electronic market for trading securities.
• Big Five Reporting: Refers to the earnings reports of the five largest technology companies.

Market Outlook and Economic Backdrop

The current market strength is interpreted as a "green light" from the Federal Reserve, especially with the best month of the year approaching. The earnings season has been solid, with a reported 10.2% EPS growth, exceeding expectations. This positive earnings performance, combined with other macroeconomic data, suggests a resilient earnings profile for companies.

A significant point of relief was the CPI data, particularly the owner's equivalent rent (OER) component, which showed improvement. This was crucial given the intense focus on CPI as a key data point for the Fed, despite being backward-looking. The market is seen as having shed some "froth," and there's a prevailing skepticism, leading to the argument that the "pain trade is higher."

Earnings Season Performance and Expectations

The earnings season has started on a strong note, particularly with bank earnings. Banks not only reported strong results for their own businesses but also provided insights into the broader economy and deal activity, indicating positive "animal spirits." However, the absence of AI-related earnings is noted as a significant driver yet to be fully revealed, with next week expected to provide more information.

Despite the positive start, there's a cautious sentiment regarding the market setup going into the "big five" earnings reports. Historically, weeks where these major companies report simultaneously have not been positive, suggesting that much is already priced in. The observation of a "buy the dip" mentality, where every dip has led to higher prices, suggests a durable rally. However, with the 10-year Treasury yield moving below 4%, investors in bonds and money markets might be seeking higher returns elsewhere, potentially driving them back into equities.

Inflation and Federal Reserve Policy

The recent CPI data is seen as a positive development that will not hinder the Fed from potentially cutting rates. This is a significant relief for many who were uncertain about the Fed's stance, especially with the current lack of government data. The fact that the CPI data was collected prior to the reporting halt makes its release particularly important.

The Fed is still considered "far from where they want to be on the inflation front," but with each passing month, the market anticipates a more "dovish" Fed. The current sentiment is that the Fed is very likely to cut rates, and the inflation report supports this view.

Consumer Health and Economic Indicators

The health of the consumer remains a critical focus, with upcoming earnings reports from Visa and Mastercard expected to shed light on this. While AI is a dominant theme, understanding the overall consumer's well-being is paramount.

Macroeconomic indicators discussed include:

• Services PMI: A flash PMI indicated that the services sector, the largest part of the economy, performed better than expected.
• Michigan Consumer Sentiment Index: This estimate was worse than expected, presenting a mixed picture when combined with the services PMI.

Semiconductor Market Performance

The semiconductor sector is highlighted as a significant driver of market performance, reaching all-time highs and new relative highs. Semiconductors are up nearly 40% year-to-date, significantly outperforming the NASDAQ's 18% gain. Despite the inherent volatility in this sector, investors are not seen as aggressively chasing these gains.

Key Arguments and Perspectives

• Tim's Perspective: Sees the current market strength as a positive signal from the Fed and a solid earnings season backdrop. Believes some market froth has been removed and that the "pain trade is higher" due to skepticism.
• Karen's Perspective: Prefers entering earnings season with stocks being down, noting that the current setup at record highs is not ideal for price action. Acknowledges the positive start to earnings season, especially from banks, but remains cautious about the AI impact and the market being "frothy." Believes the Fed is still far from its inflation goals but anticipates a dovish stance eventually.
• General Consensus: The market is relieved by the CPI data, which supports the expectation of Fed rate cuts. There's a strong "buy the dip" mentality, contributing to the rally's durability. However, caution is advised heading into the "big five" earnings reports due to historical performance. The semiconductor sector is a key performer, driving market gains.

Notable Quotes

• "It tells me that we have a green light to at least the best month of the year from the Fed's perspective." (Tim)
• "We're 10.2% EPS growth, which is better than expected coming in." (Tim)
• "This is the best sign we've seen an owner's equivalent rent for an overall CPI number in months." (Tim)
• "I always say I like to much rather go in with the earning with the stock being down like I would like to see the banks were down thankfully going in." (Karen)
• "The Fed is still far from where they want to be on the inflation front But as each month goes by, we get closer to a Fed that will be doubbish no matter what." (Karen)
• "I think what you're seeing today is people are kind of sighing relief and realizing, okay, the Fed is very likely going to be cutting rates because with the inflation report, it's really not going to hinder them from doing so." (Karen)
• "I mean my opinion is there's no room for error, right? The market's full." (Speaker on "big five" reporting)
• "I I think it it absolutely does and and I I do think while we've had guests come on and say that they think money markets are actually seeing inflows and maybe that's a better place to be and that's by the way that that makes a lot of sense if you're worried about where markets sit here." (Speaker on buy the dip mentality)
• "It's hard to feel as if everybody doesn't think Meta is going to save the day, right?" (Speaker on Meta's earnings)

Conclusion

The market is currently benefiting from a combination of a seemingly dovish Fed outlook, a solid earnings season, and positive signs in key economic indicators like OER. While there's a prevailing "buy the dip" sentiment that suggests a durable rally, caution is warranted heading into significant earnings events. The semiconductor sector is a standout performer, driving much of the market's upward momentum. The health of the consumer remains a critical factor to monitor, with upcoming reports from payment processors expected to provide further insights. The overall sentiment is one of cautious optimism, with the expectation of eventual Fed rate cuts influencing market behavior.