As a finance expert, I'm always looking beyond the headlines, and this week, while geopolitical events certainly captured our attention, the underlying economic data offered some compelling insights. It was a surprisingly strong week on the data front:
First, let's talk inflation. Both headline CPI at 2.7% year-over-year and core CPI at 2.6% year-over-year held steady in December. What's particularly interesting is that the tariff-related inflation we've been watching seems to be decelerating, with core goods contributions remaining flat from November and easing off their August and September peaks. This stability is a welcome sign.
Consumer spending also showed resilience, with retail sales rebounding a healthy 0.6% month-over-month in November, driven by broad-based gains across sectors. And on the production side, manufacturing output surprised to the upside, rising 0.2% month-over-month in December against expectations of a slight contraction.
Now, what does this all mean for monetary policy? This combination of stable inflation and robust spending and production data has naturally led to a recalibration of market expectations for Fed rate cuts. We've seen those expectations fall from nearly 60 basis points just a week ago to about 45 basis points for the year. The market is clearly digesting the strength of the economy.
Beyond the macro, earnings season for the fourth quarter kicked off with the big banks, but the real headline grabber was TSMC. The semiconductor giant announced ambitious plans to boost capital expenditures by as much as 37% this year and significantly expand capacity in 2028-29, all driven by insatiable AI demand. This is a clear signal of where future growth lies.
So, when we tally it all up – geopolitical tensions, tempered Fed rate cut expectations, but undeniable strength in AI demand – the market's reaction was a modest 1% decline for the Nasdaq-100® this week, accompanied by a roughly 5-basis-point rise in 10-year Treasury yields, pushing them above 4.2%.
Looking ahead, here's what I'll be keeping a close eye on next week:
- November PCE inflation and spending data on Thursday.
- Preliminary January PMIs on Friday.
- The revised Q3 GDP figures, also out on Thursday.
- And, of course, any Supreme Court decisions on Tuesday, especially if they touch upon IEEPA tariffs.
