If economists did weather reports, this week's forecast would call for a data blizzard. Yet visibility should improve as the markets get much-anticipated readings on inflation, retail sales, and industrial production ahead of the Fed's next policy meeting on January 28.
Few economists expect Fed Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) to ease monetary policy again later this month. Neither do we. This week's data could confirm or alter this conventional wisdom—starting with the December consumer price index (Tue).
The Fed plot thickened last week after President Donald Trump directed Fannie Mae and Freddie Mac to buy $200 billion of mortgage bonds. It's the kind of monetary function normally reserved for the Fed. It struck many as a ploy to revive quantitative easing. The announcement came as Fed Governor Stephen Miran told Bloomberg he's looking for 150 basis points of rate cuts this year.
The only thing missing, of course, is substantially lower inflation and a recession to require such aggressive easing. This week features speeches by several Fed officials that may shed light on the talking Fed heads’ thinking, starting with New York Fed President John Williams (Mon) and followed by Governors Miran (Wed), Michael Barr (Thu), Michelle Bowman (Fri), and Vice Chair Philip Jefferson (Fri).
Here's a look at this week's data releases most likely to influence the timing and extent of any further Fed rate cuts:
(1) Inflation. Since the 43-day government shutdown in October and November, investors have struggled to gain a clear view of inflation. Many investors took the 2.7% y/y CPI gain in November, down from 3.0% in October, with a few grains of salt (chart). The shutdown likely distorted the Bureau of Labor Statistics’ (BLS) efforts to collect price data. This raises the stakes for the latest CPI and PPI readings. They’ll be among the last pivotal releases ahead of the FOMC’s January 28 rate decision.
The CPI (Tue) inflation rate may have moderated slightly. The Cleveland Fed's Inflation Nowcasting model expects a 0.2% m/m increase, or 2.6% y/y. As the PPI (Wed) is for November, the data are of less utility. November import/export prices (Thu) also hit the tape.
(2) Retail sales. Retail sales (Wed) likely increased slightly in November following October's flat reading (chart). Overall, we think consumption remains on solid footing despite rising cost-of-living pressures and weak employment. Other key updates on demand this week include December existing home sales (Wed) and mortgage applications (Wed) for the week ending January 9.
(3) Jobless claims. We expect layoffs to remain low. That's surely been the main takeaway from recent trends in initial unemployment claims (Thu) (chart). Even if demand for labor is cooling in some areas, the AI-driven job market implosion many fear has yet to arrive.
(4) Composite economic indicators & business surveys. The composite cyclical indicators (Thu) for December should show that the coincident index remains at a record high, while the (mis)leading index continues to fall. Also, given the lags in hard official data, National Federation of Independent Business’ Small Business Optimism Index for December (Tue) should be informative after having risen to 99 in November. Later this week, the New York and Philadelphia Federal Reserve banks release their January business surveys (Thu).
S&P 500 forward earnings per share is our favorite coincident indicator. It has been rising faster in recent weeks, reaching record highs (chart).
