VIDEO: Why We Could Be in for a Trump-Powell Showdown

In today’s Daily Rundown video, Chris Versace breaks down the January Flash PMI report explaining how weather impacted the headline reading, and why new order strength and job gains paint a more vibrant picture of the economy. He also discusses the inflation findings in the report that will likely have the Fed be more hawkish than dovish exiting next week’s policy meeting.

Capping a week of AI and data center spending announcements, Meta Platforms META CEO Mark Zuckerberg adds even more fuel to the AI arms race, sharing that Meta will boost its capital spending by 50%-70% this year. That adds support for several of our holdings, and we discuss why the next two weeks could bring more of the same. 

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. Friday, January 24. End of the week. And so far, it looks like the market is set to put in a positive one, as is the portfolio, even though stocks have shifted and are in the red today on Friday, following the flash January PMI report from S&P Global.

Now, parsing the report, we did find that yes, the US economy started off 2025 at a slower pace. The headline PMI figure retreated to 52.4, again, that's the flash reading. And that's down from 55.4 in December. When we look at the flash reading, just put some context around it. That's a nine month low, and it really reflects a drop in service sector activity.

If you remember, the manufacturing economy, according to the various PMI datas over the last few months, has been below 50, so sluggish or contracting. It's really been the service economy that has been carrying the overall economy and these positive revisions that we've seen in GDP.

Now, when we look at the flash service reading for January, it came in at 52.8. That's down from 56.8 in December, so kind of a big drop. But we have to remember, and this fact was cited in the PMI report is the impact of weather. We have had a number of severe winter weather storms to contend with. And I think that we can kind of see some credence to the fact that the underlying economy is a little more robust than what the flash headline figure suggests.

And what I'm referring to is a couple of different things. First, new order activity remained robust. Hiring rose to the fastest pace in the last 2 and 1/2 years, and confidence levels among those surveyed in the report remain elevated. So to us, this suggests that this January drop likely to be something of a blip and that the economy remains on solid footing. And the Fed does not have to worry about the jobs market. That's the good news.

The not so good news, however, is-- and this report really makes it clear-- is that inflation remains an issue. In fact, S&P found inflationary pressures intensified in January for both input and output prices across services and goods. Suppliers are putting forward fresh rounds of price hikes, and companies, according to S&P findings, are once again attempting to pass costs on to consumers.

So not good in terms of the Fed's fight on inflation. And if anything, it argues that when the Fed emerges from its next policy meeting next week, its comments are likely to skew more hawkish than dovish.

Now, from our perspective, we're likely to see this report kind of push on timing expectations for Fed rate cuts. But we're really going to want to see confirmation-- remember this is just the flash report. We're going to want to see confirmation in the upcoming final PMI reports for January, not just from S&P Global but also from ISM as well. We'll also look for confirmation in the upcoming January employment data, both in the monthly employment report and from ADP and other sources.

If we do get that confirmation that the economy is firm, that hiring is taking off and inflation pressures are kicking up, we think that the market is eventually going to come back around to saying, you know, it's not just inflation, but with the economy this strong, why does the Fed need to cut rates?

Now, the market had already been thinking that we might just get one, maybe two rate cuts in 2025. But the reality is we see more data like this. The timing of that rate cut is going to get pushed off. Right now, it's right around May, June. It could easily slip into the back half of the year.

But there's something else that we need to think about. Yesterday during his world economic forum address, President Trump said he will, quote, "demand interest rates drop immediately." Well, I have to say that that comment viewed against today's data suggests that we might have some renewed tension between President Trump and Fed Chair Powell. But we'll see if that happens.

In our thinking, though, as we tend to weigh out scenarios and probabilities, the risk we have to contemplate is this-- if inflation is already sticky or trending higher, what will it mean if Trump implements tariffs and they are inflationary as expected? We're going to have to pay real close attention to the data and some important dates, including the one that has been bandied about by President Trump as potential phase-in dates for tariffs.

Principally Canada, Mexico and maybe some others, that is February 1. If we do see that, and depending on what we hear from the Fed, some prudent action for the portfolio may be called for, but I don't want to jump the gun. Let's see what develops in the coming days.

In the meantime, let's get back to the portfolio. And today, we did have a very solid report out from American Express with stronger than expected increases to its quarterly dividend. We covered that in an alert to you this morning. And as we finish up the company's earnings call, we will have a follow-up alert with more thoughts on the quarter price target and much, much more. So please be sure to keep an eye out for that alert.

Also today, Meta CEO Mark Zuckerberg announced the company will spend $60 to $65 billion in CapEx this year. That's a big increase from the $38 to $40 billion Meta targeted for 2024 during its September quarter earnings call. Now, that's not only a big increase, with a hefty bump in AI and data center spending, it also caps another similar big week of announcements regarding AI and data centers.

And keep in mind, we're likely to have another one next week. Not only does Meta report, but we have Microsoft reporting, ServiceNow, Eaton as well. And then the following week, we have Amazon and Google reporting as we enter February.

Now, what we've seen so far confirms that the AI arms race that we've been talking about, it's in play. And we would be surprised if other companies, besides Meta, don't post big year-over-year capital spending increases for 2025. As we see it, whether it's these announcements, the one for Stargate earlier this week, this is all very positive for several holdings in the portfolio. You knew who they are-- NVIDIA, Marvell, Eaton, Vulcan Materials, and United Rentals.

Now, as I mentioned, we will be back with follow-up comments from American Express. So please, again, be sure to keep your eye on your emails and alerts for that. We also have our weekly roundup coming later to you today, and over the weekend, yes, another edition of signals and soup as I like to call them-- signals on Saturday, some more fun related stuff, the portfolio soup, as it were, on Sunday. So be sure to look for those Alerts as well. And with that, I'll say have a great weekend, and we'll see you back here on Monday.

At the time of publication, TheStreet Pro Portfolio was long META.