At TM3 Wealth, it is important that you are well-informed about what is happening in the markets. Here are a few of the key topics of conversation that deserve the most attention this month. If you have any questions or would like to continue the conversation, please reach out.
The latest jobs reports show mixed signals of cooling and resilience. Job openings rose unexpectedly in November1, driven by the volatile business services sector, while the quits rate declined, adding evidence pointing to potentially slower wage gains in the coming months. Average hourly earnings grew modestly, reinforcing the trend of easing wage pressures. However, payrolls grew more than expected in December, boosted by new healthcare jobs, while unemployment dipped to 4.1%2. Softening wage growth, at least at the levels seen so far, are likely good news in the Federal Reserve’s assessment, but the growth in job openings in November and new jobs in December are likely to mean the Fed maintains a cautious approach.
Tariff concerns may be driving up inflation expectations, as highlighted in the University of Michigan’s consumer sentiment preliminary January survey. While overall sentiment dipped, confidence in current conditions improved as future expectations dropped to a six-month low. Consumers anticipate rising prices, with inflation expectations for the next year jumping to 3.3%, and medium-term expectations reaching levels not seen since 20083. This sentiment is echoed in the bond market with rates continuing to rise. Meanwhile, concerns about higher unemployment are increasing, though joblessness is only predicted to rise modestly in the near term.
Disinflation is progressing and the latest Consumer Price Index (CPI) report may douse any remaining suspicion that the Federal Reserve may need to tighten policy further. In December, headline inflation increased 0.4%, while the core CPI rose a modest 0.2%4. Temporary price jumps in vehicles and air travel contributed to the core CPI increase but may likely be temporary. Core inflation indicators, like rents and core services, suggest a sustained slowdown, with annualized rates showing muted price pressures.
Looking ahead, the most recent reports though the middle of January support the case for the Fed to adjust policy by March. Seasonal adjustments and slowing wage growth should further temper inflation in rents and services. Any increase in goods inflation, driven by temporary demand or tariffs, is expected to remain modest due to a stronger dollar and stable energy prices. However, risks remain on trade policy uncertainty along with temporary risks relating to the impact of the LA fires.
The bottom line: Interest rates continue to march higher and with them, shorter-term volatility expectations also continue to rise. The rise in bond yields since mid-December has largely been on the back of a view that economic data remains largely solid, but one that may prevent the Federal Reserve from continuing their previously telegraphed path this year. Job growth and declining unemployment conflict with other signs of a cooling jobs environment, such as easing wage pressures and a slowing quits rate. Inflation clearly remains a concern, driven by tariff pressures and rising expectations, though disinflationary trends may provide some relief. As before, risks remain on both the economic and capital market front that may drive periodic bouts of volatility this year. However, if the economy continues to perform, those impacts may be dampened, if or when they arise.
Sources:
- Bureau of Labor Statistics, https://www.bls.gov/news.release/jolts.nr0.htm
- Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
- University of Michigan Surveys of Consumers, http://www.sca.isr.umich.edu/
- Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
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The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The Bureau of Labor Statistics (BLS) is an agency of the United States Department of Labor. It is the principal fact-finding agency in the broad field of labor economics and statistics and serves as part of the U.S. Federal Statistical System. BLS collects, calculates, analyzes, and publishes data essential to the public, employers, researchers, and government organizations.
The University of Michigan Consumer Sentiment Index tracks consumer confidence and sentiment among households or consumers. Surveys of consumers collects data on consumer attitudes and expectations, summarized in the index, in order to determine the changes in consumers’ willingness to buy and to predict their subsequent discretionary expenditures.
