1/17/25: Inflation Moderates in December, Strengthening Fed Confidence

Market participants focused on inflation this week, along with trends in consumer spending. Inflation readings for December moderated, which should provide the Fed with more confidence in progress toward their inflation target as they approach the next policy meeting on January 28^th and 29^th. The Consumer Price Index increased 0.4% month-over-month and 2.9% year-over-year in December. Core CPI, excluding food and energy prices, rose 0.2% month-over-month and 3.2% year-over-year, slowing from last month and coming in lower than consensus expectations. Shelter continued to moderate as a contributor to monthly price increases after a long run of significant influence in the overall basket. Prices at the wholesale level also rose less than expected in December, as the Producer Price Index for final demand rose by 0.2% month-over-month and 3.3% year-over-year in December. Notably, the overall monthly rise was due to an increase in prices for goods, while prices for services were flat. December final demand prices excluding food and energy were unchanged month-over-month and are up 3.5% from a year ago.

December Retail Sales advanced broadly, providing evidence of a solid pace of consumer spending in the holiday season. Retail Sales rose 0.4% in December, after an increase of 0.8% in November and below the consensus expectation of 0.6%. Spending was solid for motor vehicles, as well as for most other categories associated with the winter holidays. Sales of motor vehicles accounted for 19.6% of the total, with non-store retailers accounting for the next largest share of sales at 17.4%. Control-group sales, which feed into gross domestic product, increased 0.7% in December, the most in three months, exceeding expectations of 0.4%. The measure excludes food services, auto dealers, building materials stores and gasoline stations.

In geopolitical news, Israel and Hamas tentatively agreed to a ceasefire deal to pause the war in Gaza for six weeks beginning Sunday. The ceasefire includes a prisoner-hostage swap along with Israel’s military withdrawal. The Israeli security cabinet approved the deal, which will now be brought to the full cabinet for a vote, where it is expected to pass despite opposition and complex political dynamics.

Both equity and bond markets rallied this week on benign inflation, solid consumer spending, and a likely pause in the Middle East conflict. The S&P 500 gained approximately 2.9%, and the Dow Jones Industrial Average was up about 3.9%. The 2-year U.S. Treasury yield fell 11 basis points to 4.27%, the 5-year dropped 16 basis points to 4.41%, and the 10-year yield fell 15 basis points to 4.61% (as of this morning). Unfortunately, the California wildfires continue to plague the area. The Chandler team remains vigilant in protecting portfolios as we assess potential impacts to related corporate and municipal credits. Our thoughts remain with all those affected.

Next week: Philadelphia Fed Non-Manufacturing Activity, MBA Mortgage Applications, Leading Index, Jobless Claims, Kansas City Fed Manufacturing Activity, S&P Global US Manufacturing PMI, S&P Global US Services PMI, University of Michigan Sentiment, Existing Home Sales, Kansas City Fed Services Activity

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