VIDEO: What Happens if Inflation Data Gets Back on Track Sooner Than Expected?

In today’s Daily Rundown video, Chris Versace explains why Friday’s November PCE Price Index data could either renew market questions over timing for the Fed’s next rate cut or help spur a market rebound. 

He also discusses the end market comments from Micron’s MU earnings and uses Lennar’s LEN delivery guidance as a springboard to share our thoughts on Builders FirstSource BLDR, United Rentals URI and Vulcan Materials VMC shares. As part of that discussion, Chris also waxes on what could happen if inflation data gets back on track sooner than expected.

Transcript

CHRIS VERSACE: Hey, everyone Chris Versace here. Thursday, December 19. And you've probably noticed that the market is rebounding somewhat relative to yesterday's late day sell off that followed the Fed's December policy meeting. Now, as we explained in our opening comments today, while the Fed pretty much delivered what everyone was expecting, 25 basis point rate cut, a cut in the number of rate cuts that it's going to telegraph for 2025 down to 2 from 4, the market rolled over yesterday afternoon. And I think that the real culprit here was the uncertainty that emerged, not so much with the Fed policy statement and the updated set of economic projections, but really during the course of Fed Chair Powell's press conference.

And the uncertainty. I'm talking about is when the Fed might actually deliver these telegraphed rate cuts in 2025. Powell's comments were extremely cautious, saying that the Fed is going to be far more measured. It has time, given the strength of the economy. But also given what's going on in inflation, it's going to be very careful, measured, cautious about the pace of forward rate cuts. And I think that really kind of spooked the market.

The fact that folks were asking Powell, why did the Fed even bother to cut rates at the December meeting didn't help much at all, in my opinion. But the meeting has happened. What has been said has been said. And now, thanks to something that Fed Chair Powell pointed out during the press conference, the market's focus will once again be back on, you guessed it, inflation.

Now, we're no stranger to this topic. We have discussed how recent data has been sticky. And coming off the Fed meeting and the market's reaction to it, the real question is going to be, when could we see a rate cut in 2025? And the first data point following the Fed's press conference is going to be tomorrow's PCE data for November. And I walked through the expectations for it. Both the headline and core figure for November are expected to tick higher month over month.

And remember that again, per Fed Chair Powell's comments, the market is really going to be focusing on those year over year numbers. And yes, that is where we did see a tick higher, again for both core and headline figures for November. The concern here is that if we happen to see that November PCE data come in higher than expected, call it warmer than the market forecast, we could see the market, once again, get wrapped up in questioning when might the Fed start to cut rates?

And what's interesting about this is that clearly there are some folks that are not listening and paying attention to the data and heeding what the Fed has been saying, especially Fed Chair Powell. Because coming into this week, Goldman Sachs even thought that we could still see three Fed rate cuts in 2025. Now, I don't know what they were looking at. I don't think they were looking at the inflation data that we're looking at or that the inflation data the Fed is looking at, but clearly, they were not really paying attention to the data.

Even this morning, we saw some folks kind of saying, well, we could still see a January rate cut. And again, I just don't think that they're paying attention. But the data that we'll get tomorrow will really, I think, cement the notion that it's going to be a little bit of time before we see the next Fed rate cut. And that's really what the market between yesterday afternoon and a little bit this morning was kind of digesting and coming around to.

So I suspect that again, if the data is, as expected, maybe a little warmer, it could be we could see the market wobble a little bit. But if the November PCE data comes in better than expected, meaning below the consensus forecasts, that could be interpreted of OK, maybe we're back on track with inflation. And that could potentially reignite the market. So we'll be paying very close attention to that November PCE data when it comes out tomorrow.

It drops at 8:30 AM. We'll have our comments to you ahead of the market. And again, based on what we learn, based on what we see, there is the chance that we might do some additional moves with the portfolio, like we did today. And just quickly, if you missed those alerts, we used yesterday's pullback to pick up more shares of Eaton for the portfolio. And we picked up some shares of ServiceNow.

And as you know, ServiceNow is one that we've been really watching very, very closely when we first bought the position. Boy, it took off. And we've been looking for an opportunity to pick up more ServiceNow shares. And we did that this morning.

Remember, still in the early stages of AI adoption. We see them extremely well-positioned as that adoption expands across a wider array of industries, including government institutions. And we'll have a signal on that to share with you on Saturday, one, I think that you're going to find a little surprising, but I think that you're going to as well.

Today we also exited the shares of PepsiCo. Remember, our thought had been that we would use some market strength to start working our way out. But as we said with you, if that didn't emerge, we would not let PepsiCo shares continue to weigh on the portfolio. And with today's opening, even though the market is trying to recover a little bit, PepsiCo shares are moving lower. That's not a good sign, in our opinion.

We opted, instead, to just exit the position completely. It buffers up our cash levels, following the other trades we made today. It also gives us a little more firepower so we can be opportunistic, depending on what we see in the next couple of days. So that's kind of what we're dealing with.

Also too, I would let you know that tomorrow, not only do we have a triple witching day, which means that it could be a little more volatile than usual, it could be a lot more volume than usual. We might also have to contend with the potential government shutdown. So it's going to be a big day tomorrow, but we will be on high alert. And more importantly, we will be there to guide you through it.

Some other quick comments that I want to make in today's video, I hope you saw our note on Micron's guidance and its discussion about Micron's comments across its various end markets. And if you read the note, you'll know what I'm about to say. If you didn't, here it is.

When we take a look at what Micron had to say about AI and data center, extremely supportive for NVIDIA and Marvell. That's why those shares are up today. When we took a look at its comments for smartphone volumes for the industry being up mid-single digits this year, really confirming the other forecasts that are out there. And Micron sees it up further in 2025. Another point of confirmation, that's why you're seeing some of the rebound in our Apple shares and our Universal Display shares.

But Qualcomm shares should also be rebounding, in my opinion. Given that the vast majority of their revenue today is still tied to the smartphone market, the big diversification starts to really unfold 2025 and accelerates in 2026. So when I look at Micron's comments about the PC upgrade cycle, starting off a little slower than in previously expected, but still seeing PC unit volumes up 5% in 2025, really back-end loaded, I'm not really that concerned about it as it relates to Qualcomm.

Again, AIPC revenue is relatively small. And as we move forward, they will matriculate on the design winds that topped more than 58 designs that they shared during their recent analyst day. Those will matriculate just as the PC market really-- as-- sorry, as the PC upgrade cycle really starts to take off. And we see that acceleration in demand for AIPCs as well. So continue to think that they're extremely well-positioned. And remember, it's that unfolding of diversification that we want to capture as owners of Qualcomm shares.

I also want to quickly touch on results from Lennar. A decent quarter, but it was the guidance where their deliveries really fell, relative to expectations. They're guiding 17,000 to 17,500 homes in the current quarter. That's down from 22,206, the November quarter. Not good, not good.

We really don't want to see that. Even though, to be fair, the deliveries in the current quarter are still expected to be up year over year. But as I think about this, where the home builders in the short term might have a little bit of a tougher slug, they're going to be focused on their margins. And I think that actually bodes well for a pickup in Builders FirstSource and its value added product lines.

Remember, they have these prefab doors, windows, and the like that really help take the pressure off the home builders in terms of their margins, but also on their design cycles. And when your customer's kind of going through a tough time and can provide a solution, you can really make some nice inroads. And I suspect that's what Builders are going to be doing in the coming quarters, not just with Lennar, but with the other large public homebuilders and other private home builders that accounts as customers.

One other thing, just as we think about Builders FirstSource, as well as our other interest rate-sensitive positions, coming off yesterday's Fed meeting, the CME FedWatch tool, which kind of tracks the consensus expectations for rate cuts, only shows one rate cut in 2025 now. That's below the two that the Fed telegraphed for 2025. And we've been thinking that likely we would see two rate cuts in 2025. And we were pleasantly surprised, relieved that the central bank joined us in thinking that.

But here's the thing. If we see inflation get back on track in the first half of the year, all of a sudden, the market is going to have to revisit the prospect of multiple rate cuts next year, more than one, maybe two that's expected that would be a positive surprise relative to the CME FedWatch tool, maybe even more. So we're not inclined to throw in the towel on these interest rate sensitive positions, one, because as it relates to United Rentals, as it relates to Vulcan Materials, we still have spending tied to various infrastructure bills. So that's going to continue to bode well for non-residential construction, as will the continued build out of data centers and power infrastructure to support them.

So we continue to see that, but also too, as we move through the next couple of quarters, we will see the trickle through benefit of 100 basis points in rate cuts the Fed delivered this year with additional rate cuts next year. Our thinking is that the housing construction activity will improve in the coming quarters. And we continue to think that the sum of rate cuts this year and next year really will make for a better housing market in 2026. So that's kind of what we're eyeing for these positions.

And as it relates to the size of those three positions in the portfolio, Builders FirstSource, Vulcan Materials, United Rentals, they're all hovering around 3.1%. So when you aggregate them, the portfolio's total exposure is a little more than 9% of its assets. That means that while we remain very positive on all of these positions, it's going to take a lot for us to step in and add additional shares of any one of the three. But the good news is that for members that are underweight the shares, Builders FirstSource, United rentals, they are oversold. That's a good time to pick them up. So if you're underweight relative to the portfolio, I would suggest you take advantage of that and true up your positions.

Now, we do have a lot more coming. As I mentioned, we have the November PCE data coming out tomorrow. Also tomorrow, we'll be watching for any progress on the government shutdown. And of one other item just to share with you tomorrow, Qualcomm and Arm begin their closing arguments in their licensing case trial. So we're going to have a lot more to talk about into tomorrow, probably over the weekend, and early next week.

So please, continue to check your email. Continue to check your alerts. We want to make sure you get our latest thinking. And if we happen to make any other moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long BLDR, URI and VMC.