January 26, 2025

QuickTakes

ECONOMIC WEEK: January 27–31

The week ahead is packed full of important economic data releases, big tech earnings reports, and central bank meetings. Economic updates will include consumer sentiment, manufacturing, economic growth, and inflation. We're broadly expecting strong growth, including the first estimate of Q4 real GDP, to come in around its historical average at 3.0% y/y (Tue), increasing from Q3's 2.7% (chart). Inflation should remain low but stuck above 2.0%. 

Here's more on what to expect in the week ahead:

(1) Central bank meetings. The FOMC will likely maintain the federal funds rate (FFR) target range of 4.25%–4.50% (Wed). The tone of Chair Jerome Powell's press conference may give insight into whether the committee is considering more rate cuts in Q1 and Q2, or whether the hawks have gained more sway over the doves. The 2-year Treasury note is currently suggesting that the Fed may not lower rates again in the coming two years, while the FFR futures market is showing roughly two more 25bps cuts this year (chart).

The ECB is likely to lower its official rate by 25bps down to 2.75% on Thursday and may signal more cuts are ahead considering the Eurozone's weak growth. The growing divergence between US interest rates and those of the rest of the developed market economies is likely to lift the US dollar (chart).

(2) Consumer. Our Earned Income Proxy rose more than 0.4% m/m in December, so we are expecting another strong month of personal income growth (Fri). With Trump 2.0 likely to extend and possibly add to income-tax cuts (e.g., a zero tax rate on tips), January's Consumer Confidence Index (CCI) might show that consumers are feeling better (Tue) (chart).

The University of Michigan's consumer survey for January showed more pessimism when it was released last Friday. However, that survey tends to track inflation expectations, whereas the CCI is more tied to labor market health. The CCI survey should show that jobs were still plentiful this month. Initial jobless claims likely remained historically low last week (Thu) outside of possible increases from the California fires.

(3) Inflation. The Cleveland Fed's Inflation Nowcasting model is projecting December's PCED headline and core inflation rates (Fri) at 0.3% and 0.2% m/m (2.6% and 2.8% y/y). However, the supercore PCED (core services ex-shelter) is likely to continue declining on a y/y basis (chart). The Employment Cost Index probably rose slightly less in Q4 (Fri) than Q3's 3.6% y/y increase.

(4) Manufacturing. January's Dallas and Richmond Fed regional manufacturing surveys (Mon and Tue) may point to the national ISM M-PMI rising above 50.0 for the first time in more than two years, which we expect to happen sometime during Q1.

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