Economic and Market Overview
January 2025
Equities and Treasuries fell early and rallied late while credit spreads treaded water over a month that saw President Trump return to the White House and the Fed’s first pause of the cutting cycle.
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After a somewhat sluggish start to the new year, the S&P 500 followed the presidential inauguration with its best four-day start to a new administration since President Reagan’s second term began in 1984 en route to a 2.8% return for the month. After a whipsaw higher and then lower, the 1/31 Treasury yield curve was little changed and just a touch steeper than its end-of-2024 version, though not before longer rates tested their late 2023 hiking cycle highs. Credit spreads were relatively quiet, navigating very tight ranges as strong demand was met with heavy supply. J.P. Morgan reported $188 billion in total investment grade issuance for the month. The first month of the year is generally heavy, and the total was 25% higher than the average of the prior four Januarys. Dealers had actually expected a bit more, however, meaning the primary market is likely to remain busy in February. It was a tale of two months for oil as WTI futures climbed over the first half and fell over the second to finish slightly up on the month. The dollar was volatile with market participants struggling to handicap the impact of the new administration’s plans for trade policy. Even so, the Dollar Index ultimately settled down just 0.1% for the period as strength versus the pound and loonie was mostly offset by weakening relative to the yen and euro.
Economic Data
Nonfarm payrolls grew at a robust 256,000 pace in December, topping forecasts by 91,000 with only an 8,000 net downward revision to the prior two months. The unemployment rate also surprised with a 0.1% decrease to 4.1% and no change to the participation rate. As for January, consensus expectations are for NFP growth of 170,000 with no change in the unemployment rate when the BLS releases data on February 7. Headline retail sales rose by 0.4% MoM, missing by 0.1%, though the November release received an identical nudge up, to 0.8%. Looking ahead, however, both the Conference Board and University of Michigan reported surprise dips in consumer sentiment. Housing data were solid in December as new home sales, housing starts and existing home sales gained MoM and beat expectations. In the manufacturing sector, hard data were mixed while sentiment surveys trended higher. U.S. real GDP grew at a 2.3% annualized rate in Q4 according to the advance release, 0.3% under consensus. Personal consumption grew by 4.2%, a full percentage point over surveys as inventories and investment weighed on the headline figure.
Inflation
Inflation data for December were encouraging and well received by the market. Headline CPI rose by 0.4% MoM as expected, but core CPI’s 0.2% increase was 0.1% softer than expected. PPI releases actually came in under forecasts across the board. Later in the month, core PCE printed at 0.2% MoM, but the unrounded figure was 0.156%, also on the softer side of consensus. This pace kept the YoY figure at 2.8% for the third consecutive month. Nevertheless, inflation expectations rose as the TIPS market expressed mild concern about the inflationary effects of Trump administration policies. The 10y breakeven rose 9 bps to 2.43% while the 5y/5y forward rate increased 6 bps to 2.34%.
Federal Reserve
The FOMC left the policy rate unchanged at their January meeting, taking a pause after three consecutive rate cuts that lowered the federal funds rate by 1%. Based on Fed communications, we expect that pause will last for many months, perhaps as late as the September meeting. Progress on inflation was bumpy at times during 2024, but the Fed believes that the underlying trend points to further disinflation towards 2%. Despite this cautious optimism on inflation, Powell and company feel little urgency to take further action since they have recalibrated policy away from emergency levels and the labor market is looking more stable in recent months. Monetary policy has now taken a back seat to the extreme uncertainty surrounding fiscal, trade and immigration policy.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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