The last week of January concluded with several key economic data releases related to the current labor market and the progress on inflationary pressure.
Progress on inflation came into focus with the Personal Consumption Expenditures (PCE) index data from December. Headline PCE was in line with consensus expectations both on a month-over-month, at 0.3%, and on a year-over-year basis at 2.6%. The Fed’s preferred gauge, Core PCE, was unchanged from the prior month at 2.8% year-over-year. Yet, Core PCE increased from 0.1% to 0.2% month-over-month, raising some concerns over the pace of slowing inflation.
On the heels of a solid holiday shopping season, the advanced release of 4th quarter 2024 GDP was reported to be 2.3% versus the consensus estimate of 2.6%. The resilient consumer continues to drive growth, as the share of Q4 GDP attributed to Personal Consumption Expenditures increased to 2.82% from 2.48% in the 3rd quarter. The biggest drag on Q4 GDP came from the Change in Private Inventories which was down -0.93%. If businesses sell more than they produce, the change in Private Inventories is negative, reducing GDP.
This week, Initial Jobless Claims were slightly lower, at 207,000, than the expected 225,000, while Continuing Claims also came in lower, at 1,858,000, than the estimate of 1,902,000. Strong consumer demand continues to be propelled by a robust labor market, which was also reflected in consumer confidence. The Conference Board’s Consumer Confidence Index result for January was 104.1, which followed December’s upward revision to 109.5. The recent data is indicative of relatively elevated confidence as the average since inception from 1967 is 96.72.
Positive US economic growth and continued strength in the labor market, provided justification for the Federal Open Market Committee (FOMC) to leave the Fed Funds Rate unchanged at 4.25 – 4.50% on Wednesday at the January FOMC meeting. Although the latest update to the Federal Reserve’s Summary of Economic Projections indicated less dovish sentiment, our view at Chandler continues to be for the trajectory of inflation to be lower in 2025. We believe monetary policy easing will continue, albeit at a slower cadence, and lower short-term yields will likely contribute to a steepening yield curve. Chair Powell also remarked that the Fed’s balance sheet asset runoff will continue as “reserves are still abundant” and the Fed intends to continue the runoff until reserve levels are “ample”.
The name DeepSeek was thrust into the capital markets lexicon this week as news of the Chinese AI startup’s less expensive open-source AI platform roiled the Magnificent 7. The US equity market decline was led by a staggering drop in Nvidia’s stock price of over -17% on Monday. The bond market was not immune to the sell-off as the flight-to-quality trade took yields down across the curve; yields were down at least 10 basis points in the 2-year through 10-year part of the curve on Monday. Yields trickled slightly higher through the week, but the yield curve shed 4 basis points of steepness from 35 basis points on the 2-year/10-year spread to 31 basis points. As of this writing, the 2-year US Treasury Note was at 4.20%, the 5-year at 4.31%, and the 10-year was at 4.51%.
Next week: Change in Nonfarm Payrolls, Employment Report, ISM Manufacturing Index, ISM Services Index, S&P Global US Manufacturing PMI, S&P Global US Services PMI, Construction Spending, JOLTs Job Openings, Wards Total Vehicle Sales, MBA Mortgage Applications, ADP Employment Change, Challenger Job Cuts, Jobless Claims, Factory Orders, Durable Goods, University of Michigan Consumer Sentiment
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