Introduction to This Week’s Economic Forecast
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 jobless claims ahead of the Fed’s next policy meeting on January 28.
Economic Calendar
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. The announcement came as Fed Governor Stephen Miran told Bloomberg he’s looking for 150 basis points of rate cuts this year. 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 and followed by Governors Miran, Michael Barr, Michelle Bowman, and Vice Chair Philip Jefferson.
Key Data Releases
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 gain in November, down from 3.0% in October, with a few grains of salt. 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 meeting. The CPI inflation rate may have moderated slightly. The Cleveland Fed’s model expects a 0.2% m/m increase, or 2.6% y/y.
2. Retail Sales
Retail sales likely increased slightly in November following October’s flat reading. Overall, we think consumption remains on a solid footing despite rising cost-of-living pressures and weak employment. Other key updates on demand this week include December personal income and mortgage applications 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 jobless claims. 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 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, the National Federation of Independent Business’ optimism index for December 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.
Conclusion
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. Forward earnings per share is our favorite coincident indicator. It has been rising faster in recent weeks, reaching record highs. As the markets get much-anticipated readings on inflation, retail sales, and jobless claims, visibility should improve ahead of the Fed’s next policy meeting on January 28.
