VIDEO: Implications of a Modestly Cooler September Core CPI

In today’s Pro Portfolio video, Chris Versace walks through today’s September Consumer Price Index and the Flash October PMI reports, sharing why they, along with recent layoff announcements, pave the way for the Fed to deliver an expected rate cut next week. However, Chris explains why we could see Fed Chair Powell spook the market about the expected December rate cut, especially if the market chugs higher near-term.

We also discuss how Intel’s  (INTC)  comments about the PC market support Qualcomm’s  (QCOM)  diversification strategy and give our take on reports that Welltower  (WELL)  may be expanding further into the U.K. market. 

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. Friday, October 24. End of the week. And you may be saying to yourself, boy, it was a busy one. I would say yes, it was, but it's going to be an even busier one next week, and we'll be running through all of that, getting you ready in today's weekly roundup that will be published late this afternoon.

But now, in our time together, I want to talk about a couple of things. The September CPI report, the flash October PMI report, what they're telling us we should expect next week, but also a few other portfolio related items. Let's get to it.

The September CPI report, as you probably saw, showed that the core CPI came in a little cooler than expected on a year over year basis, 3.0% not the 3.1% the market was looking for and where it's been kind of stuck the last couple of months. Headline CPI, that did tick a little higher, also hitting 3% on a year over year basis, up from 2.9% the prior month.

Now, even though we didn't see a lot of progress on the core CPI figure, the market's kind of taking it as a win. Not as bad as some had expected it might be. But we have to be mindful. Still not a lot of progress there.

Now, before we move on to the flash October PMI data, I am going to say that sticking with inflation data, we are seeing headlines. The White House is already warning us that government shutdown means there may not be a next inflation report for October. Why, you might ask yourself?

Well, because the surveyors, as they say, cannot be deployed to the field. Hard to collect the data if the surveyors are not going out. I would say plausible, but not exactly helpful and constructive for us. But it simply means that we're going to have to stick to looking at other data that we do get, and that includes the PMI data.

So with that, let's turn to the October flash PMI report. What did it show? Both manufacturing and service sector activity picked up in October. That is good news. It tells us the economy continuing to hum on the pricing front, excuse me. Input prices continue to chug higher, but companies continue to grapple with a challenging environment that is making it harder and harder for them to pass through those input costs.

So output costs are not rising as much. We've talked about this over the last several weeks and why margins at companies would be a focal point during the current earnings season. What we see in this report tells us that will remain the case.

Let's remember, too, that with the October flash PMI report, as we talked with you yesterday, we said that the big takeaway on this, the big focus, is going to be on what it says about the employment market. Why? Well, based on the comments we've had from recent Fed officials, it seems to be more focused now on the jobs market or the employment market, and I'll explain the difference in a second, then it is inflation. Inflation still important, but increasingly a little more concerned about what's going on in the employment market.

So what did the October flash PMI have to say on that front? It says that employment rose for the 10th time in the past 11 months. Now, that's a little different than when we got in ADP's August and September employment report that showed contractions. But remember, we're triangulating the data. The commentary says, though, from the flash PMI report, that the rate of job creation improved from September's recent low. So it signals a little bit of a pickup.

But remember, that's the hiring front. The employment market, job creation. But we also want to look at on a net basis. And what that means is we have to factor job creation with layoffs to get a net number. And we are seeing a pickup on the layoff front. I'm referring to some of the announcements we've seen over the last several weeks from the companies like PWC, Starbucks, Ford, ConocoPhillips, and even Accenture that have all announced layoffs.

But to those and others, we can add some of the announcements that we got in the last 24 hours. And I'm talking about Target, Applied Materials, and Meta. Target said it's going to cut 1,800 jobs, or about 8% of its corporate jobs, ahead of getting a new CEO next year. Applied Materials cutting 1,400 jobs, or about 4% of its workforce. Meta cutting 600 jobs in AI and an unspecified number of jobs elsewhere in the area of risk and compliance.

I suspect that what Meta is doing is leaning into AI, just like it's doing in other parts of its business, to drive the costs lower, increase productivity, which has been part of our rationale for thinking that Meta can continue to deliver further margin improvement, improve its cash flow, that will help fund its big capital spending.

Now, as we think about all of this, our view is that slowing job creation and the tick lower in the September core CPI, that's enough for the Fed to deliver what we'll call a pre-emptive rate cut next week. Helping support that thinking, well, it's the continued dip lower that we saw in the final University of Michigan Consumer Spending, sorry, Consumer Sentiment, excuse me, Michigan Consumer Sentiment figure for October.

It hit 53.6. The preliminary reading, 55. So a move lower. Also lower than the 55.1 in September. And if you're looking for the real drop, then we want to compare it to October of 2024, when that figure was 70.5.

So as we take a look at that and the reason behind it, which is the continued concern over inflation pressures, we think that the Fed is poised, when we net everything out that we learned today, to deliver that 25 basis point rate cut. But here's the but. Whether or not we get another rate cut in December, just given the data that we saw today, that's going to be determined by what we see between now and the end of that December policy meeting, based on the data that we do get.

So far, the government shutdown looks like it's going to persist into November. That's going to hobble the data that we're going to get, just like I mentioned, for the potential lack of inflation report in November for the month of October. I do think likely this means we're going to see Fed Chair Powell next week reiterate the Fed remaining data dependent.

And I think that could bother some folks in the marketplace that are hell bent on getting at least one more rate cut this year and another one after that in the first quarter of 2026. Our position is that we're going to continue to follow the data. That hasn't changed. But again, what we're seeing so far suggests that we're likely to see the Fed deliver that rate cut next week.

I will say that to the extent that the stock market continues to chug higher between today, Monday, Tuesday, that could set the market up to be rattled a little bit if Powell does deliver a little more sobering tone during the presser that comes after the policy decision next Wednesday.

What are we going to do? We'll navigate the short term, continue to focus on the medium to longer term, of course, being opportunistic where it makes sense. And if we need to be prudent ahead of the Fed meeting, we will. We will also be keeping our nose to the grindstone, especially when it comes to ferreting out other data on the inflation front and the employment market, so we can continue to update our thinking as to what the Fed may do and what the market thinks it might do.

Well, with that said, I do want to talk about a couple other things real quick. As you probably noticed last night, Intel reported, and the key takeaway for us was, man, the commentary on the PC market, it is favorable. I'll stop short of saying strong, but I'll just say very, very favorable. Intel now sees the total available market for PCs this year hitting about 290 million units. To give you some context, that's the fastest since 2021. The commentary coming out of Intel, enterprises continue to Windows 11. No surprise, given the mothballing of Windows 10.

And this is important for us. AI PC adoption continues to grow. Now, we take that last part as very supportive of Qualcomm's ongoing diversification strategy away from smartphones into other markets, including leveraging the AI PC market. So we see that as a positive.

I also want to talk real quick about Welltower. There's a report out by Sky News that Welltower might buy Barchester Healthcare. It's one of Britain's biggest nursing home operators. This is not exactly a new geographic market for Welltower. In the first half of this year, about 16% of Welltower's revenue came out of the UK. And some context for why I think they're doing this.

In 2022, about 19% of the UK population was over 65, and that figure is expected to rise considerably in the coming years. So very much in line with our aging of the population investment strategy. And it's just building on its presence in existing market. Candidly, if they're able to buy Barchester Health, subject to the terms, I think strategically, it makes sense, because it really shores it's position up in that market that is growing.

So we will have to see what happens. If we hear about this transaction and/or depending on what we see in Welltower's quarterly results early next week, one or both could give us a reason to revisit our Welltower price target.

And finally, if you missed our note on the big Google Anthropic news, please be sure to take a look at it. I don't want to necessarily spoil it, but I will say that it supports our thinking that there is a rising tide lifting multiple AI chip boats, and that includes our position in Marvell.

And that, my friends, is our video for today. I wish you a wonderful weekend. You do have homework, though. Be sure to read those signals that we'll have out tomorrow, and we will see you back here on Monday for what is going to be a jam packed week with 10 portfolio companies reporting a Fed meeting. And we'll see what else happens over the weekend. Have a great weekend. We'll talk to you soon.

At the time of publication, TheStreet Pro Portfolio was long QCOM and WELL.