January 12, 2025

QuickTakes

The Economic Week Ahead:

January 13–17

The week ahead is packed with inflation, consumer, and manufacturing indicator releases. Long-term Treasury yields could climb closer to 5.00% this week if fears about stickier inflation intensify. We're expecting solid updates on consumer spending. In addition, Q4's S&P 500 bank earnings reported late in the week should be strong and counterbalance any hit to stock valuations from higher yields (chart).

Here's more on what we are expecting this week:

(1) Inflation. According to the Cleveland Fed's Inflation Nowcast, December's headline and core CPI (Tue) are projected to be up 0.38% and 0.27% m/m, respectively. That would put the y/y readings at 2.9% and 3.3%. December's CPI and PPI (Tue) are likely to show core consumer services inflation remains stuck well above 2.0% y/y (chart).

The CPI and PPI both feed into the Fed's preferred inflation gauge, the core PCED rate. If this week’s reports on both metrics are hot, as we suspect, then December's 3- and 6-month core PCED inflation rates likely climbed further above 2.0% (chart).

(2) Inflation expectations. The jump in consumer inflation expectations in early January, as measured by the Survey Research Center, might have been attributable to concerns that tariff increases will boost prices. The New York Fed's comparable survey measure (Mon) for December might have remained subdued.

(3) Federal deficit. The 12-month sum of the federal budget deficit probably rose above $2.1 trillion in December (chart). That might remind investors of the old bearish adage: "The bond crop never fails." However, there should be plenty of buyers as the 10-year Treasury yield approaches 5.00%, as there were during October 2023.

(4) NFIB small business survey. Small business owners reacted to Trump 2.0 by increasing plans to hire and invest in November. We're expecting to learn that more of the same happened in December. Even more business owners may report plans to increase selling prices and wages, which would add to inflationary fears (chart).

(5) Consumer spending. Our Earned Income Proxy rose 0.5% m/m in December. We're expecting strong income growth to have fed into robust December retail sales, led by auto sales (Thu).

(6) Manufacturing. Hours worked by manufacturing employees increased by more than 0.2% m/m in December, the second straight month of higher hours. So we're expecting industrial production (Fri) to have risen last month (chart).

January's regional business surveys from the New York and Philly Fed's (Wed & Thu) may point to some improvement in domestic manufacturing. However, higher interest rates and the continued deluge of imports from China might continue to weigh on manufacturers’ businesses.

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