Market Monitor | Mid-Month Update

Headlines and Highlights
  • Core inflation shows signs of slowing: Headline inflation inched higher last month but core elements eased, suggesting renewed progress in the downward move toward the 2% target. The Consumer Price Index edged up to 2.9% from 2.7%, a third straight rise since reaching a 3½ year low of 2.4% in October. But markets cheered the first drop in six months in core CPI, which excludes food and energy prices, to 3.2% as a hopeful sign the Federal Reserve will resume interest-rate cuts this year. Fed officials have indicated a pause is likely this month after gradually reducing the benchmark rate by a percentage point to 4.25% since September.
  • Labor market caps strong year with more gains: U.S. employers added the most jobs since March last month, 256,000, in an unexpected hiring surge that contradicts expectations of a job market slowdown. The economy averaged 186,000 new jobs a month for the full year, slightly above the pre-pandemic average from 2016-19. Further evidence of a stable labor market came last week when the number of Americans filing new applications for unemployment benefits fell to an 11-month low.
  • Earnings revive market after sluggish start to year: Better-than-expected results from big banks got fourth-quarter corporate earnings season off to a strong start, nudging most stock indexes into positive territory after a tepid opening to 2025. The S&P 500, which had carried a December sell-off into the new year, was up 1.2% at mid-month. The small-cap benchmark was up 1.5% while international developed stocks added 0.6%. Bond prices fell fractionally due to rising rates.
Chart of Interest

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Our Views
  • The latest inflation data showed consumers still facing above-average price increases for essentials such as groceries and housing. However, cost hikes in apartment rentals diminished further and clothing costs were essentially flat last month as some of the stickiest inflation categories showed improvement
  • The U.S. 10-year Treasury yield briefly touched its highest level in a year this week at 4.8%, the latest evidence of bond-market jitters. Global bond yields have climbed amid concerns about the potential for tariffs and higher inflation that could result in a slower pace of interest-rate cuts this year. The U.S. 10-year yield has not exceeded 5% since 2007.
  • The U.S. dollar has continued its march higher against other leading currencies for a fourth consecutive month in January, pressuring international stocks and overseas revenue from U.S. multinational companies. The dollar has risen 9% since the end of September, fueled by Donald Trump’s plans to impose tariffs on imports and cut taxes. We do not expect this trajectory to continue.
  • American consumers increased their holiday spending at a solid pace despite sticky inflation. Retail sales increased by 0.4% last month and a revised 0.8% in November, according to the Commerce Department. Online holiday spending in the same two-month period jumped 8.7% over the previous year, according to separate data from Adobe Digital Insights, boosted by big discounts in electronics.
  • U.S. manufacturing remains in a mild slump as the new president takes over. A survey of senior manufacturing executives compiled by the Institute for Supply Management showed the industry in slight contraction in December for the 25th month out of the past 26. Manufacturers, while wary of tariffs, hope for a rebound under the Trump administration.

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