Equity and bond prices fell after the release of the January jobs report and in anticipation of potential across-the-board U.S. tariffs in the week ahead. These market moves appear to have ignored the potential for the January Consumer Price Index inflation report to show easing year-on-year inflationary pressures when it is released on February 12. However, base effects seem likely to send year-on-year total and core CPI inflation rates lower in this week’s forthcoming CPI report, which could provide financial markets with much-needed relief as investors’ expectations for 2025 Federal Reserve interest rate cuts improve. Although the likelihood of a March interest rate is likely to remain highly improbable, the odds for an interest rate cut in May or June could rise significantly if inflationary pressures ease, in which the greenback would likely fall, supporting equity and bond prices.
January Jobs Report And Tariff Fears Impacted Financial Markets Ahead Of Inflation Reports
After the release of the January jobs report on February 7, the dollar and bond yields rose while equity and bond prices fell. These market moves were about more than the jobs report, as this report topped off a week of solid economic data and rising fears about forthcoming U.S. tariffs.
The solid January 2024 jobs report topped last week’s economic docket. However, other data were also positive—and stronger than expected.
The January ISM Manufacturing Index rose to 50.9, the strongest level since September 2022. Meanwhile, the ISM Non-Manufacturing Index decelerated to 52.8 but continued to expand with a reading above 50, reflecting ongoing growth in the services sector. Plus, weekly initial jobless claims remained low at 219,000, while the latest JOLTS report from the U.S. Bureau of Labor Statistics reflected 7.6 million open jobs in December. The only truly weak economic data last week was a significant decline in December factory orders by 0.9%. The week was otherwise filled with positive growth data for the economy.
As a result of last week’s solid growth data, the latest Atlanta Fed GDPNow shows Q1 2025 GDP likely to be 2.9%, based on data available through Feb. 7, 2025.
In the wake of solid growth data, the January jobs report weighed further on the potential for a March Fed interest rate cut as payrolls added 143,000 net new jobs in January with a sizable upward revision of to the previous two payroll figures and the unemployment rate fell to 4%, the lowest rate since May 2024,
The release of solid jobs and growth data, coupled with policy concerns, moved markets significantly. Market mavens, traders, and institutional investors started bracing themselves for additional U.S. tariff announcements this week while also discounting the potential for easing January year-on-year CPI consumer inflation rates.
Waiting For This Week’s January Inflation Reports
The coming week’s economic docket includes multiple key growth and inflation reports.
January economic growth reports that will be released this week are likely to be generally positive, including retail sales and industrial production. Jobless claims are poised to remain relatively low.
This week’s January inflation reports are likely to be more important for markets and Fed expectations than the growth reports. The January Consumer Price Index and Producer Price Index inflation reports are likely to show modest month-on-month pressures, with the potential for decelerating year-on-year CPI and core CPI rates.
Inflation is currently the Fed’s top concern. December year-on-year consumer inflation rates were elevated, with total CPI at 2.9%, core CPI at 3.2%, total Personal Consumption Expenditures inflation at 2.6%, and core PCE at 2.8%.
Despite already elevated inflation rates, Prestige Economics has forecasted that the January CPI report on February 12 could show decelerations in year-on-year total CPI to 2.5% from 2.9% and core CPI to 3.0% from 3.2%.
Potential Consumer Inflation Impacts On Fed Policy
The December Federal Open Market Committee projections for the federal funds rate reflected expectations of only two 0.25% rate cuts by the end of 2025. These forecasts were impacted by the acceleration in year-on-year consumer inflation rates through November, and a further acceleration in year-on-year December CPI consumer inflation pushed market expectations for future Fed rate cuts even lower.
On the upside, Prestige Economics has been expecting a deceleration in the January year-on-year total CPI and core CPI that could be the beginning of easing through the second quarter, with lower year-on-year inflation rates in Q2 2025 due to base effects. In fact, according to Prestige Economics, year-on-year total CPI and total PCE consumer inflation rates could fall to the Fed’s 2% target in 2025, even though they are currently well above target. However, core inflation rates could still remain above the Fed’s 2% for most or even all of 2025.
If year-on-year consumer inflation rates fall in the second quarter due to base effects, market participants may be currently underestimating the potential for two or more rate cuts in 2025.
The economic growth outlook is solid, especially after the 2.3% GDP growth rate in Q4 2024, the rebound in January manufacturing and material handling, and the solid January jobs report. As such, the Fed is not under pressure to cut interest rates imminently, and it is also highly unlikely to cut interest rates in March 2025. Nevertheless, a 0.25% rate cut in May 2025 or June 2025 still seems possible as year-on-year total CPI consumer inflation likely falls due to base effects.
Future Inflation Report Implications And Risks For Financial Markets
Market expectations reflect an exceptionally low probability of an interest rate cut in March. However, a rate cut in May or June still seems possible, especially if year-on-year consumer inflation rates ease in the months ahead.
Even though the December FOMC projections reflected expectations of two 0.25% Fed interest rate cuts this year, forecasts often differ greatly from reality. Moreover, there could be cause for the Fed to cut interest rates by more than 0.5% in 2025, especially if year-on-year consumer inflation rates fall significantly in Q2 2025. Unfortunately, consumer inflation data for Q2 2025 is still several months in the future. In the immediate term, data in the forthcoming January 2025 consumer inflation report could show modestly easing year-on-year inflation rates that revive the potential for three 0.25% rate cuts in 2025.
Trade and tariff risks present a high degree of uncertainty and volatility for markets in the week ahead and beyond. However, if year-on-year total consumer inflation rates decelerate in the January CPI report, monetary policy factors would fundamentally weigh on the dollar and bond yields, supporting equity prices, bond prices, and even industrial commodity prices.
What do you expect for the January CPI Report?
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