February 9, 2025

QuickTakes

ECONOMIC WEEK:

February 10–14

The focus of the economic week ahead will be inflation. Businesses tend to raise prices at the beginning of the year; that could result in January CPI and PPI releases (Wed and Thu) that are hotter than expected even though both are seasonally adjusted. A few Fed officials recently worried out loud that tariffs could interrupt the progress toward the Fed's 2.0% inflation target. We expect Trump 2.0 will generate more noise than signal in the upcoming inflation news, as the economy is buffeted by four “D”s: deregulation, deportations, duties, and de-bureaucratization.

We believe that the economy's stellar performance will continue notwithstanding all the commotion coming out of Washington. On that note, Q4's earnings season is shaping up to beat even our very bullish expectations of 12.0% y/y EPS growth. Analysts entered earnings season expecting 8.2% y/y EPS growth; after big-tech earnings reports, that's now 13.3% (chart).

On the other hand, analysts have been very quick to get pessimistic on 2025 earnings growth (chart). We think they are overcompensating in reaction to either tariff worries or a possible slowdown in the Magnificent-7’s capital spending, or both. We're expecting Q1 EPS growth of at least 10.0% y/y.

While the economy has been doing very well, this week's data might suggest it is cooling. Retail sales and industrial production (both Fri) are likely to slow from December’s growth rates. We caution against interpreting this as a reaction to Trump 2.0 or the start of a broad-based slowdown, but we recognize that it may weigh on stock prices while boosting bond prices.

Here's more:

(1) Inflation. The Cleveland Fed's Inflation Nowcast projects January's headline and core CPI (Tue) rose 0.24% and 0.27% m/m, respectively. That would put the y/y readings at 2.85% and 3.10%. We're watching supercore (core services ex-housing) in both the CPI and PPI (chart). A continued deceleration would likely lower bond yields and boost stock prices. A reversal in last month's progress would likely have the opposite effect.

(2) Expected inflation. January's New York Fed consumer survey (Mon) will likely show inflation expectations are rising, ostensibly due to tariff worries, just as the University of Michigan's survey did last week (chart). That said, essentially all of the increase was due to respondents who identify as Democrats, whereas Republicans' expectations fell. Partisanship is infecting these consumer surveys and, along with low response rates, may be rendering them less useful.

(3) Small businesses. December's NFIB Small Business Survey showed owners are very bullish on Trump 2.0, expecting sales to increase and raising their plans to hire and invest (chart). January's survey (Tue) is likely to be a bit less upbeat on tariff worries.

(4) Retail sales. Our Earned Income Proxy rose 0.3% m/m in January. We're expecting real retail sales rose around 0.2% m/m, as the California fires may have reduced hours worked in the economy but not actually dented consumer spending much (chart).

(5) Manufacturing. Hours worked by manufacturing employees fell by 0.7% m/m in January, which is likely to weigh on industrial production (Fri) (chart).

However, we expect both series to rebound in February and perhaps begin a sustained upward trend, as the ISM M-PMI is finally in expansionary territory above 50.0. Then again, Trump tariff turbulence could certainly be reflected in manufacturing in coming months.

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