Look both ways before assessing

The problem with historical economic data is that it is backward-looking but financial markets are inherently forward-looking. As 2024 data rolls off, markets are confronted with uncertainties they cannot quite yet assess. 

Markets breathed a sigh of relief when December wholesale and retail inflation data were released last week, both better than expected. The core Consumer Price Index (CPI), which excludes volatile food and energy costs, rose 0.2% in December, below the 0.3% expected, and 3.2% over the last year, lower than the 3.3% in November. Markets looked past the fact that 3.2% is nowhere near the Federal Reserve’s 2% inflation target. Surprisingly, Fed Governor Waller echoed this view, saying that the CPI report was very good and that Fed rate cuts could follow in the first half of the year, if more good data comes in. The awkward fact is that core inflation did improve in 2024, falling from 3.9% to 3.2%, but at that pace, it would take a while to get to 2%. 

December retail sales were a little softer than had been expected, but underlying details were a bit firmer. On balance, sales increases were broad-based, with some discounting and likely some buying ahead of potential tariffs. Weekly jobless claims rose slightly, but remain very low, and industrial production rose well above expectations, helped by the resumption of activity following the Boeing strike and by recoveries following the hurricanes in the fall. 

The Fed next meets on January 29, a week after the new administration takes office. Focus now shifts to 2025.