The Headlines Are Shouting, But the Data Isn’t

• NY Fed one-year inflation expectations were 3.4%.

• The three- and five-year expectations held steady at 3%.

• The numbers remain in line with their historical averages.

The media may love a good crisis, but the data isn’t cooperating…

The financial media loves nothing more than to scare you. Whenever they find a good boogeyman, they run with it. They know we’re wired to pay more attention to negative stories than positive ones. Because of our past, we still carry traits that make us alert to threats for our survival. So, a story about a pending crash or the next doomsday scenario is sure to draw plenty of views and clicks. Yet many times, that’s all those stories end up being good for.

Inflation has been one of those hot‑button topics. When the Federal Reserve had to raise interest rates to fight runaway inflation a few years ago, the stock market dropped. And ever since, even though inflation has cooled, outlets like CNBC, the Wall Street Journal, and Bloomberg keep running stories about a price surge being right around the corner—even though the pace of growth has eased.

Yesterday, we received another key inflation number that points to stabilization. According to December data from the New York Fed, inflation expectations for both short- and long-term horizons haven’t budged. In fact, they remain consistent with the survey’s historical figures. That’s important for policymakers because they want to ensure households don’t start buying goods in anticipation of even higher prices—a dynamic that can trigger an inflation spiral.

Yesterday, we received another key inflation reading that points to stabilization. According to December data from the New York Fed, inflation expectations for both short‑ and long‑term horizons haven’t moved. In fact, they remain in line with the survey’s historical figures. That matters for policymakers because they want to make sure households don’t start buying goods in anticipation of even higher prices—a behavior that can trigger an inflation spiral.

If household expectations stay anchored, as the recent data suggests, the Fed should have plenty of room to keep lowering interest rates later this year. That should support a steady, long‑term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Yesterday, the New York Fed released its Survey of Consumer Expectations for December. It summarizes information gathered from 1,300 households about their outlook on inflation, household finances, and the labor and housing markets. The survey rotates respondents in and out to keep results fresh.

The survey helps central bank policymakers understand how people think and behave. These readings matter because they show whether households believe inflation will keep rising or return to normal. Based on the latest results, consumers’ near‑term expectations are little changed…

Inflation expectations for 12 months out are 3.4%. The gauge has averaged just over 3.3% based on New York Fed records going back to mid‑2013. We can see that households’ near‑term price outlook jumped in 2021 and 2022 as prices surged. Then, as pandemic stimulus faded, expectations leveled off around 3% again in 2024. And after a couple of bumps earlier this year, the gauge appears stable once more.

It’s a similar story for the longer‑term outlook. Consumers don’t expect price growth to change. The three‑year inflation expectation held steady at 3% in December, in line with the New York Fed’s historical average…

If we move out to five years, we can see that inflation expectations were the same last month as October and September, holding at 3%. That’s inline with the longer-term average, based on data going back to early 2022…

As I noted at the start, the Fed is watching these numbers closely to gauge how much support it can provide to the economy. It doesn’t want long‑term inflation expectations to surge again as they did in 2021. So far, we’ve seen a few hiccups, but we aren’t seeing a repeat episode, according to New York Fed data.

Based on the most recent CPI data for November, annual price growth of 2.7% is still above the Fed’s 2% target. Yet it’s starting to decline. And if the Cleveland Fed’s expectation for 0.2% growth in December is correct, the annualized pace could cool to 2.6%.

So, we’ll want to keep a close eye on the New York Fed’s household expectations data. Because based on what I’m seeing, the Fed should have room to keep supporting economic growth. And if Chair Jerome Powell signals that policymakers are increasingly comfortable with the inflation outlook, it should help underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

China's annual consumer price inflation rose in December, driven by rising food prices, but the full-year rate remained weak while producer deflation persisted; the December consumer price index rose 0.8% from the same month in 2024, according to National Bureau of Statistics data – Reuters. (Why you should care – the data continue to point to a weak domestic economy in China and lagging foreign demand)

China plans to approve some imports of Nvidia’s H200 chips as soon as this quarter, giving the company renewed access to a critical market; Chinese officials are preparing to allow local companies to buy the component from Nvidia for select commercial use – Bloomberg. (Why you should care – this would provide a boost to Nvidia’s forward guidance as the company has said Chinese demand would overwhelm current supply)

Investors are finally showing love to companies outside of the tech sector; growing economic optimism, along with a more cautious view of the artificial-intelligence build-out, is prompting a major “rotation trade” on Wall Street, with investors selling technology stocks and buying up the shares of most every other type of business – WSJ. (Why you should care – rotation into other sectors based on more broad based economic optimism should also support a continued rally in small cap stocks)

U.S. Treasury Secretary Scott Bessent called for the Federal Reserve to continue cutting interest rates; he elaborated that the only ingredient missing for stronger economic growth is lower rates – Bloomberg. (Why you should care – lower rates would ease borrowing costs for households and businesses, boosting discretionary income in the process)

Federal Reserve Governor Stephen Miran said he’s looking for 150 basis points of interest-rate cuts this year to boost the U.S. labor market; Miran said Fed officials have room to ease further given his view that underlying inflation was likely running at 2.3% - Reuters. (Why you should care – Miran is likely to vote in favor of aggressive rate cuts at the January 27-28 monetary policy meeting)

Economic Calendar:

China – CPI (YoY) for December (12 a.m.)

Japan – Household Spending for November (12 a.m.)

Germany - Exports, Imports for November (2 a.m.)

Germany - Industrial Production for November (2 a.m.)

France - Consumer Spending for November (2:45 a.m.)

France - Industrial Production for November (2:45 a.m.)

Eurozone – Retail Sales for November (5 a.m.)

ECB’s Lane (Chief Economist) Speaks (7:45 a.m.)

U.S. – Nonfarm, Manufacturing, Private Payrolls for December (8:30 a.m.)

U.S. – Unemployment Rate for December (8:30 a.m.)

U.S. – Average Hourly Earnings for December (8:30 a.m.)

U.S. – Building Permits, Housing Starts for October (8:30 a.m.)

Canada – Employment Change for December (8:30 a.m.)

Canada – Unemployment Rate for December (8:30 a.m.)

U.S. – University of Michigan Consumer Sentiment (Preliminary) for January (10 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)