Lots to digest

The holiday-shortened trading week was a little light on economic data, leaving the void to be filled with focus on the new administration’s policies and actions. The flurry of activity led to corresponding market volatility, as both stock and bond markets see-sawed as they followed headlines from Washington.

The S&P 500 stock index bounded to a new all-time high last week. Stocks are buoyed by good fourth-quarter corporate earnings and hopes of further Federal Reserve rate cuts and possible tax cuts. The bond market has taken some solace that inflation is not worse than feared, and both markets seem relieved that initial policy actions appear to be less disruptive than they had thought earlier.  

The economy ended 2024 on a strong note, so incoming data will receive heightened focus. Weekly jobless claims inched a little higher, from 203,000 to 217,000, but remain well-behaved. January surveys of manufacturing and services managers were mixed, as the manufacturing survey hit a seven-month high, crossing over the 50 level that signifies expansion, while the services survey fell sharply, to a nine-month low, though still above 50. In the manufacturing survey, concern about the impact of tariffs and inflationary pressures as input costs and average selling prices rose were balanced by a jump in hiring. And the final January Michigan consumer sentiment survey saw an easing lower of both current conditions and expectations. Consumer inflation expectations dipped from 3.3% to 3.2%, but this still ties the highest reading on medium-term inflation expectations since June 2008. The Federal Reserve has a lot to think about before it next meets on January 29.