If you haven’t already seen it, open up a web browser and Google “kayaker spit out by whale in Patagonia.” I’ll wait.

Okay, you’ve had your chance, so here’s the spoiler: In the clip, a huge humpback whale suddenly rises out of a frigid-looking sea off the Chilean coast and swallows a dude and his yellow boat whole as the man’s father films the entire terrifying episode from his own little boat nearby.

I can only imagine the terror the younger kayaker felt during the three seconds he spent in the whale’s mouth (not to mention his father’s panic as he started to work out how he would explain the whole highly improbable thing to his wife when he got home). But thankfully, the story has a happy ending: The whale quickly spit out the younger man and slipped back into the deep while the two stunned men bee-lined it back to shore.

There are plenty of directions we could go from here that would turn this near miss into crass humor. But instead, let’s take the safer, more compliance-friendly path and use last week’s most famous internet video to make a point about markets: Just like the Chilean whale, markets had second thoughts about what last week’s inflation data means for Fed policy and quickly spit out an earlier decision that might otherwise have given investors heartburn.

Here’s what happened: On Wednesday, the Bureau of Labor Statistics released its latest look at consumer inflation. At first glance, the numbers seemed to confirm what consumer-based surveys have been saying for a few weeks — prices

are in danger of accelerating again. Specifically, consumer prices at both the headline and the core level grew 0.5% and 0.4%, respectively — both about one-tenth of a percent faster than economists expected.¹ Gulp. Both equity markets and bonds responded by selling off, with the S&P 500 Index gapping 1% lower on the open while US Treasuries did their own impression of Jonah-and-the-whale by diving fast.

Then on Thursday, the Bureau added insult to injury by releasing producer prices, which also showed a little bit more spice than markets were expecting by rising 0.4% on the headline and 0.3% on the core.² This time, though, both equity and fixed-income markets resisted the urge to puke and instead spit out their fears and rallied moderately on the heels of the release.

There are several possible explanations for this change of heart, beginning with the observation that January tends to run a little hot on the inflation front. Then there’s the fact that Thursday’s Producer Price Index (PPI) was generally seen as a little less worrisome than Wednesday’s Consumer Price Index (CPI). By this line of thinking, the economy can probably tolerate a little acid reflux by the egg-weary consumer as long as businesses aren’t yet feeling the need to gobble Tums.

The deeper details matter, too, because a significant portion of the CPI’s increase was driven by shelter — as much as 30% by the Bureau of Labor Statistic’s own reckoning. That’s significant as well, because shelter is only about half as important inside the calculation of the Fed-favored PCE as it is inside the math that drives CPI.³ Besides, higher shelter costs were hardly unexpected given the stubbornness of home price growth (the seemingly formulaic way that shelter costs find their way into inflation data was probably comforting at the margin, too).

But rising prices matter to us, the rent-paying, egg-buying (and home-buying) public, which is something the Fed understands perhaps better than those market mavens who were willing to look the other way when inflation went 0-fer-two last week on the economic surprise meter. And that brings us to last week’s second-most interesting piece of economic data — retail sales.

Like inflation, last week’s report on retail spending was a surprise, but in the other direction. Specifically, retail sales dropped 0.9% in January even though economists thought they might increase a little bit.⁴ Whether that reflects data quirks like an inadequate seasonal adjustment after a fairly robust holiday shopping season, or something more fundamental (like a reaction to accelerating prices) is open to debate. But it seems relevant to me that among the areas hit hardest inside January’s retail sales figures were categories of a discretionary nature. All else equal, that might suggest the upper-end consumer’s latte- and Lexus-buying tendencies are finally at risk.

In the grand scheme of things, a little bit of consumer cooling probably isn’t a bad thing. At a minimum, a 0.9% collapse in retail spending (-0.4% if you ignore cars and gas), makes it harder to argue that prices are being pushed higher by ‘panic buying’ that might in turn create an inflationary spiral — that most-terrifying of economic phenomena whereby consumers rush to buy stuff before inflation takes hold, inadvertently igniting the very inflation they’re trying to avoid in the process. Relevant, too, is the fact that it was hard to find much evidence of behavioral changes in January’s inflation and spending data that would suggest consumers and businesses are panicking about trade policy, either.

So, while we could use all this to make another comparison between the economy and a Chilean whale’s digestive habits [...must...resist...temptation...], let’s drop the whole whale thing as played out. Instead, let’s take it as a good thing that consumers might finally be feeling queasy enough about inflation and the economy to cool it a little bit. That allows us to close with a quick nod to the National Federation of Independent Business’ small business sentiment survey which, as suspected, showed signs of stalling after turning positively giddy after November’s election.⁵

As we’ve discussed before, small businesses are particularly sensitive to things like changes in tax policy and regulation than are bigger firms. That made it easy to guess that November’s election result would generate a spike in the NFIB’s survey (which, of course, it did.) More recently, though, the honeymoon seems like it might be coming to an end: according to last week’s data, small business sentiment dipped below expectations and uncertainty about the future rose to its third-highest reading ever — material changes from the last few months that bear close analysis.

That leaves us trying to figure out whether the animal spirits that were so obviously unleashed in markets, across businesses, and among consumers last November are beginning to wane. And that will be critical to understanding the market environment as 2025 wears on.

Should be a whale of a time.

What to watch this week

This week starts with a three-day weekend for most in the U.S., but the parade of macro data continues with several reads on the health of the manufacturing sector, a smattering of housing market data and a continuation of fourth quarter earnings. Earnings season is quickly becoming a numbers game, where commentators will shift their focus from anecdotes issued by high-profile firms to broad aggregates. Now that the season is rolling under its own momentum, look for broad trends in the earnings data to color your view of the macro.

That said, there are still a few must-read reports on tap this week. First among these is probably Walmart, scheduled to release results on Thursday. Walmart single-handedly accounts for a very significant share of retail sales in the U.S., which gives Thursday’s report extra weight given last week’s big disappointment (see above for details). In addition to that, we’ll get several opportunities to read more about China’s ongoing malaise (China’s web search giant Baidu is due to report on Tuesday).

From the macro side, we’ll get our first two regional Federal Reserve (The Fed) manufacturing reports (Empire on Tuesday and Philly on Thursday), as followed by flash PMIs for both manufacturing and services on Friday. One small detail inside last week’s PPI release was that goods prices — which had been the focus of much of the dis-inflation the economy may have enjoyed — are now accelerating faster than services prices, at least when viewed through that lens.⁶ Scan the ‘prices paid’ and ‘prices received’ line items inside the Purchasing Managers Index and regional fed data for any hints that this is either changing or accelerating.

Speaking of inflation, scan Friday’s update of consumer sentiment from the University of Michigan to see whether consumers’ expectations regarding inflation have eased at all. Similarly, Wednesday’s Business Inflation Expectations survey from the Atlanta Fed is also probably worth a read. This survey moves a little more slowly than other survey-based data on prices but is generally hinting at the same thing: Progress against inflation has stalled out somewhere just above the Fed’s 2% target.

On the housing front, we’ll get existing home sales on Friday as well as an update of homebuilder sentiment from the National Association of Homebuilders on Tuesday. For obvious reasons including mortgage rates and affordability, homebuilders are less than upbeat and have had to rely on incentives and discounts to move inventory. That, plus unusually cold and sloppy weather across much of the country, makes it harder to imagine a boost to building activity that would help rectify the well-known shortfall in inventory that has in turn kept upward pressure on home prices. For that to improve, something will have to change within the overall environment. Tune in on Tuesday to see if that’s the case.

Finally, the minutes from the Federal Reserve’s January meeting will be released on Wednesday. That meeting was pretty much a nothing-burger, with the Fed making good on the market’s overwhelming expectations by keeping rates on hold and hinting strongly that it will pass up the opportunity to cut again in March. Still, the minutes can provide deeper context that the statement and post-decision press conference can’t. I’d scan the document for any suggestion that Fed economists and policymakers are adjusting their thinking to accommodate the shifting sands of fiscal policy to shape their view.