Stocks are flattish as we enter Fed week. Bonds and MBS are up.
The week ahead will be dominated by the FOMC decision on Wednesday. Right now the chance of a rate cut is pretty slim. We will also get inflation data with the Producer Price Index along with some Fed-speak.
Consumer sentiment improved in January according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment lifted about 3.5 index points this month, with minor gains seen across all index components. While the overall improvement was small, it was broad based, seen across the income distribution, educational attainment, older and younger consumers, and Republicans and Democrats alike. However, national sentiment remains more than 20% below a year ago, as consumers continue to report pressures on their purchasing power stemming from high prices and the prospect of weakening labor markets. Aside from tariff policy, consumers do not appear to be connecting foreign developments to their views of the economy.”
Inflation expectations moderated to 4.0%, however we are still up on a YOY basis. Long-term expectations increased from 3.2% to 3.3%. Note that the breakeven inflation rate on 5-year Treasury Inflation Protected Securities is 2.4%, so there is a gap between investors and consumers.
The Index for Leading Economic Indicators fell 0.3% in November, according to the Conference Board. “Throughout 2025, weak consumers expectations led the decline in the LEI, followed by new orders. The remaining components of the leading index were relatively muted in November, with the strongest positive contributions coming from labor market data, like initial claims for unemployment insurance and weekly hours worked in manufacturing. Despite real GDP growth hitting 4.4% in Q3 2025, the LEI continues to suggest that the US economy will slow in 2026.”
It seems like the high GDP numbers are not affecting sentiment. I guess the trade balance’s effect doesn’t register with the average consumer. This makes sense although rising exports should improve things.
ISM New Orders and consumer expectations were the negative drivers for the index. Initial Jobless Claims and average weekly hours added to the index.
I did a Substack piece over the weekend discussing the US dollar and its role as the reserve currency. Check it out here.
