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This week, the PPI, CPI, and Retail Sales data will be significant. This follows a strong December job report. The household survey was also robust, showing that nearly 478,000 people found jobs while the number of unemployed individuals decreased by 235,000.
In context, there were 7.1 million unemployed individuals in November, compared to 6.88 million in December—a substantial drop. A closer look shows that the number of people who lost jobs declined 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 unemployment rate’s decline.
The report also included notable revisions. For instance, the July unemployment rate was adjusted from 4.3% to 4.2%, while March saw an upward revision from 3.8% to 3.9%. These revisions are critical as they redefine the series’ high points. Significant revisions are expected in January, particularly for the household survey, which will make comparing previous reports difficult. Changes to the establishment survey are also planned for January, which may complicate future data interpretation.
Friday’s University of Michigan inflation data shows year-ahead inflation expectations rose from 2.8% in November to 3.3% in December, and the five-to-ten-year outlook increased from 3.0% to 3.3%—a series high. This is the highest level since 2008, signaling persistent inflation concerns despite the Fed’s aggressive rate hikes. Preliminary data can be volatile, so revisions at the end of the month will be crucial.
This week brings a wealth of key data. On January 14th, the NFIB survey will provide additional insights into inflation. Due the same day, the PPI report is expected to show a 0.4% month-over-month increase, with core PPI rising 0.3% from 0.2%. On Wednesday, CPI is expected to rise 0.3% month-over-month, with year-over-year core CPI projected at 2.9%, up from 2.7%. CPI swaps suggest the headline figure may come in hotter than expected.
Retail sales are forecast to decline by 0.6% on January 16th, while the control group will remain flat at 0.4%. That day, import prices and initial jobless claims will also be released, followed by housing starts data on Friday.
Regarding Fed activity, notable speakers include Williams on January 14th and 15th, Kashkari and Barkin on the 15th, and Goolsbee, who will speak before the Fed enters its blackout period starting January 18th.
After the jobs report, markets are signaling fewer rate cuts in 2025, with the first expected around September or October. The odds of a second-rate cut are only about 13%. Forward rates suggest three-month Treasury yields could rise by 15–20 basis points in the next 12–18 months, implying a potential rate hike 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 at 4.95%. The spread between the 10-year and 2-year Treasuries has widened to 40 basis points, while the 30-year minus 3-month spread reached 61 basis points. A further breakout could lead to significant steepening.
In currency markets, the dollar index (DXY) is nearing resistance at 109.60, with the potential to reach 111.
The euro is holding at 1.02–1.03, but a break below 1.02 could push it under parity.
The yen remains weak; barring unexpected action from the Bank of Japan, the USDJPY could run to 165.
For the S&P 500, last week’s close around 5,825 broke key support at 5,875. If downside momentum continues, we could see the index 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 heading into the CPI report, with the potential for a volatility crush afterward.
-Mike
Terms By ChatGPT:
1. BLS (Bureau of Labor Statistics): A U.S. government agency that collects and analyzes economic data, particularly related to employment, wages, and inflation.
2. Household Survey: A BLS survey measuring employment, unemployment, and labor force participation by surveying households, distinct from the payroll-focused Establishment Survey.
3. Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work.
4. PPI (Producer Price Index): Measures the average change in selling prices received by domestic producers for goods and services, often used as a leading indicator of inflation.
5. CPI (Consumer Price Index): Measures the average change in prices paid by consumers for goods and services, serving as a primary gauge of inflation.
6. Core CPI/Core PPI: The CPI or PPI excluding volatile components like food and energy prices, used to assess underlying inflation trends.
7. NFIB Small Business Optimism Index: A survey of small business owners’ economic sentiment, covering hiring, capital spending, and inflation pressures.
8. Inflation Expectations (University of Michigan Survey): Projections of future inflation rates by consumers, covering short-term (one-year) and long-term (five-to-ten-year) periods.
9. Yield Curve: A graph plotting interest rates of bonds with different maturities; steepening suggests expectations of stronger growth or inflation.
10. Gamma Flip Zone (Options Market): A level where market makers shift hedging behavior, amplifying price movements in the stock market.
11. Put Wall: A level with significant open interest in put options that acts as a price floor due to hedging-driven buying pressure.
12. DXY (U.S. Dollar Index): Measures the value of the U.S. dollar relative to a basket of six major currencies, reflecting its strength globally.
13. Swaps Market: A financial market for derivative contracts like interest rate swaps; CPI swaps reflect expectations for future inflation rates.
14. Negative Gamma Regime: A scenario in the options market where market makers’ hedging amplifies price volatility by selling into declines or buying into rallies.
15. Treasury Yield (e.g., 10-Year, 30-Year): The return on investment for U.S. government debt securities with specific maturities, used as economic benchmarks.
16. Basis Point (bps): A unit equal to 0.01%, used to describe changes in interest rates or percentages.
17. Fed Blackout Period: The time before a Federal Reserve meeting when officials avoid public comments on monetary policy to prevent market influence.
18. Bull Flag (Technical Analysis): A chart pattern resembling a flag on a pole, indicating a continuation of an upward price trend.
19. Forward Contracts (e.g., Treasury Forward Contracts): Agreements to buy or sell an asset at a future date for a predetermined price, often predicting future interest rates.
20. Parity (Currency Markets): When two currencies have equal exchange rates; e.g., the euro falling below parity with the dollar means it’s worth less than one dollar.
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.