The shortened week left much to be desired in the way of market activity. Maybe that’s a good thing considering recent volatility. Equities and bond yields traded within a reasonable range this week. Markets were primarily focused on the Fed meeting minutes from January, as well as a pair of economic releases from this morning. Any movement in either direction was largely attributable to concerns over an A.I. bubble and simmering tensions with Iran.
Wednesday’s release of the January FOMC meeting minutes surprised markets by suggesting a growing consensus among voting members that a rate cut may not be the next move. Gregory Daco, chief economist at EY-Parthenon, commented, “The minutes carry a distinctly more hawkish tilt. This sets up an interesting dynamic if – and when – Kevin Warsh is confirmed as Fed Chair.” Additionally, the minutes showed most of the FOMC believed last year’s labor market weakness, which had been the impetus for three consecutive rate cuts, was fading at the time of the meeting while persistent price pressures could force the Fed to reverse course on their current rate trajectory. The record noted, “Several participants cautioned that easing policy further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective.”
This morning’s data for CORE PCE, the Fed’s preferred inflation measure, was reported at 0.4% MoM and 3% YoY, versus estimates for 0.3% and 2.9%, respectively. The MoM increase for the December market is the fastest acceleration since February. Markets chose to hone in on that figure, as opposed to a distorted GDP report. Within the PCE data, food and accommodation were the largest contributors to the outsized print, while recreation services posted a record monthly advance. The figure pours cold water on the optimism from the friendly CPI print earlier this month and reinforces the aforementioned Fed member concerns about stubborn price growth.
The initial assessment of Q4 GDP was reported at 1.4% versus consensus estimates of a 2.8% increase. The figures were below all forecasts in a survey of Bloomberg economists and were largely attributable to the 6-week government shutdown, which is estimated to have subtracted as much as a full percentage point from the figure. Federal government spending declined by 24.1% at the end of the year, the most since 2020. Consumer spending, which comprises two-thirds of GDP, decelerated to 2.4% from 3.5% in the prior quarter. Either way, the figure results in a 2.2% annual GDP figure, which indicates an overall solid year for economic growth after contracting in Q1 and performing well in Q2 and Q3.
THIS JUST IN: The Supreme Court struck down President Trump’s tariff policies in a 6-3 vote, saying he exceeded his authorities by invoking a 1997 emergency-powers law. The justices didn’t address the issue of redress and will leave it to a lower court to determine what, if any, refunds will be necessary for importers. The White House immediately responded and said it will quickly replace the levies using other legal tools. Stocks and bond yields rose on the news.
KEY INDICATORS THIS WEEK
Electric Vehicle Sales – According to data from S&P Global, EV sales are down for the first time since 2016, seeing a 48% plunge in December after buyers rushed to secure vehicles in Q3 ahead of the Trump Administration’s revocation of the $7,500 EV tax credit.
Next Week – Case-Shiller Housing Price Index and PPI.