The market digested a myriad of news this week, with a focus on the Federal Reserve, as well as incoming economic data, Megacap earnings, and a looming partial federal government shutdown.
As expected, the Federal Reserve kept the federal funds rate on hold at a target range of 3.50%–3.75% at the January meeting, following three 25-basis-point rate cuts in 2025. Governors Christopher Waller and Stephen Miran dissented in favor of a 25-basis point cut. Fed Chair Powell cited stronger economic growth and some signs of stabilization in the labor market. Powell also indicated that inflation remains somewhat elevated, primarily due to tariff impact on the prices of goods, while noting that disinflation is occurring in services. He indicated that risks have diminished on both sides of the dual mandate and emphasized that monetary policy is well positioned to let the data determine future policy.
Subsequently, President Trump indicated that he intends to nominate Kevin Warsh for the next Fed Chair to succeed Jerome Powell at the end of his term in May. Warsh served on the Federal Reserve Board of Governors from 2006 to 2011 and was known as an inflation hawk. However, he has argued for lower rates in recent months. Several key Republicans have vowed to reject any nominee until the Department of Justice probe into the central bank is resolved.
In economic data this week, US home prices rose a higher than expected 1.39% year-over-year in November, according to data from S&P Cotality Case-Shiller, pausing a recent downward trend in home price appreciation. The Conference Board Consumer Confidence Index plunged to 84.5 in January, the lowest level in over a decade, amid concerns over economic uncertainty, high prices, and a sluggish labor market. While confidence continues to plummet, consumer spending has surprised to the upside. The December Producer Price Index (PPI) came in higher than expected at 0.5% month-over-month and 3.0% year-over-year. The Core PPI (excluding food and energy) rose 0.7% month-over-month and 3.3% year-over-year, driven primarily by services. Several components of PPI feed into the Personal Consumption Expenditures Index (PCE), which may signal future increases in the Fed’s preferred inflation gauge.
The week concluded with a likely agreement on immigration policies which should result in an abbreviated federal government shutdown. Corporate earnings remained generally strong, although the risks of escalating spending on AI gained prominence. The U.S. dollar sank to its lowest level in four years, and precious metals remained elevated but volatile as investors weighed unpredictable fiscal and trade policies, a growing budget deficit, and risks to Federal Reserve independence. Short rates declined marginally and the curve steepened, with the 2-year U.S. Treasury trading at approximately 3.54% and the 10-year at 4.25% at the time of writing, as investors continue to price in moderate easing by the Federal Reserve later this year.
Next Week: Final Benchmark Payrolls Revision, S&P Global US Manufacturing PMI, ISM Manufacturing, US Treasury Quarterly Borrowing Estimates, JOLTS, Wards Total Vehicle Sales, MBA Mortgage Applications, ADP Employment Change, US Treasury Quarterly Refunding Announcement, S&P Global US Services PMI, ISM Services Index, Challenger Job Cuts, Jobless Claims, US Employment Report, University of Michigan Sentiment, Consumer Credit.
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Data source: Bloomberg, Federal Reserve, and ADP. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rate
S&P Cotality Case-Shiller 20-city non-seasonally adjusted home price index (widely known as the Case-Shiller index)
The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.