Stocks week ahead, the steepening yield curve supports this outlook, with the 10-year yield rising to 4.76% and the 30-year at 4.95%.
Stock market forecast: this week will bring significant economic indicators, including the PPI, CPI, and Retail Sales data, following a robust December jobs report. The household survey also showed strength, with nearly 478,000 jobs added and a decrease of 235,000 in the number of unemployed individuals.
In November, there were 7.1 million unemployed individuals, which dropped to 6.88 million in December—a notable decline. A closer examination reveals that the number of job losses fell from 3.394 million in November to 3.251 million in December. Additionally, new entrants to the labor force decreased from 2.87 million to 2.686 million, contributing to the drop in the unemployment rate.
The report included important revisions, such as the July unemployment rate adjusted from 4.3% to 4.2%, and an upward revision for March from 3.8% to 3.9%. These changes are crucial as they redefine the historical context of the series. More significant revisions are expected in January, particularly for the household survey, complicating comparisons with previous reports. Adjustments to the establishment survey are also anticipated, which may affect future data interpretation.
On Friday, the University of Michigan's inflation data indicated that year-ahead inflation expectations rose from 2.8% in November to 3.3% in December, while the five-to-ten-year outlook increased from 3.0% to 3.3%—the highest level since 2008. This signals ongoing inflation concerns despite the Fed's aggressive rate hikes. Preliminary data can be volatile, so revisions at the end of the month will be critical.
This week’s key data includes the NFIB survey on January 14th, which will provide additional insights into inflation. The PPI report is expected to show a 0.4% month-over-month increase, with core PPI rising to 0.3% from 0.2%. On Wednesday, CPI is projected to increase by 0.3% month-over-month, with the year-over-year core CPI expected at 2.9%, up from 2.7%. CPI swaps suggest the headline figure may be hotter than anticipated.
Retail sales are forecast to decline by 0.6% on January 16th, while the control group is expected to remain flat at 0.4%. That same day, import prices and initial jobless claims will also be released, followed by housing starts data on Friday.
Regarding Federal Reserve activity, notable speakers include Williams on January 14th and 15th, Kashkari and Barkin on the 15th, and Goolsbee, who will speak before the Fed's blackout period begins on January 18th.
Following the jobs report, markets are signaling fewer rate cuts in 2025, with the first cut expected around September or October. The odds of a second rate cut are only about 13%. Forward rates indicate that 3-month Treasury yields could rise by 15–20 basis points in the next 12–18 months, suggesting potential rate hikes if economic data remains strong and inflation persists.
The steepening yield curve supports this outlook, with the 10-year yield rising to 4.76% and the 30-year yield at 4.95%. The spread between the 10-year and 2-year Treasuries has widened to 40 basis points, and the spread between the 30-year and 3-month Treasuries reached 61 basis points. A further breakout could lead to significant steepening.
In currency markets, the dollar index (DXY) is approaching resistance at 109.60, with the potential to reach 111. The euro is hovering between 1.02 and 1.03; a break below 1.02 could push it under parity. The yen remains weak, and unless the Bank of Japan takes unexpected action, the USD/JPY could rise to 165.
For the S&P 500, last week’s close around 5,825 broke key support at 5,875. If the downside momentum continues, the index may drop to the mid-5600s. Options market dynamics will play a significant role, with the put wall at 5,800 and the negative gamma flip zone at 5,930. Expect elevated implied volatility leading up to the CPI report, with the potential for a volatility crush afterward.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
