Capital markets perspective: The boys of summer

Capital markets perspective: The boys of summer

01.13.2025

Like last year (and just about every year so far in my adult life), I haven’t even finished taking down our holiday decorations yet and its already time to start thinking about lazy Sunday afternoons at the ballpark slathered in sunscreen, sipping cold beer and eating food that I know is terrible for my health. That’s because pitchers and catchers report to spring training in less than a month, marking the unofficial start to the 2025 Major League Baseball season.

This is the second sports metaphor for this Perspective in as many weeks — something I’ll admit to being a little embarrassed about (and for which I apologize). But you don’t have to be baseball fan to be warmed by images of ballplayers playing catch in the Arizona desert or the Florida humidity, because those idyllic scenes are a happy reminder that softer, lazier days lie ahead — and that’s a feeling you can appreciate even if you don’t plan to watch a single inning of baseball in 2025. But it’s also bittersweet, because as much our hearts may be looking forward to summer, our heads know that we have still a few months of cold, nasty weather to endure before the edge comes off.

Markets, too, have plenty of reasons to snuggle deeper into their flannel jammies against the cold while looking fondly forward to the softer rhythms of summer. Performance so far this year hasn’t been terrible by any stretch, but after a two-year rally that began almost exactly on the day the calendar flipped from 2022 to 2023, we’ve become conditioned to expect only fair skies and temperate weather for all things speculative. That makes last week’s relatively modest declines in stocks (and the somewhat less-than-modest jumps in longer-term rates) feel like 2025 has blown into town like a polar vortex.

Meanwhile, the Federal Reserve’s interest rate-easing campaign looks like it may be under indefinite rain delay. As of this morning, markets are pricing in a hold by the Federal Reserve (the Fed) during each of the next three Fed meetings, which would leave the Fed funds rate at its current level of 4.25-4.50% until the Federal Open Market Committee’s (FOMC) June 18th meeting.1 For context, that means the economy could be dealing with rates more or less where they are today until just a few weeks before the 2025 All-Star Break. It’s also a notable step down in rate expectations relative to last October: back then, the plurality of probability was calling for a Fed Funds rate of around 3.75 – 4.00% by the time the 2025 mid-year break rolled around. That arithmetic represents at least 50 basis points of incrementally tighter policy compared to what markets believed in late October, when Shohei Otani’s Dodgers were wrapping up their five-game clubbing of Aaron Judge’s York Yankees in last year’s World Series.

What’s responsible for this change-of-heart? Quite simply, inflation isn’t as dead-and-gone as the New York Mets world record for the losingest season by a big-league team (which the Chicago White Sox eclipsed by losing 121 games last year — yeah, you’re welcome, bar trivia enthusiasts...). How do we know inflation fears are still lingering in the background? Because consumers told us so: According to last Friday’s mid-month consumer sentiment update from the University of Michigan, consumers now expect prices to rise 3.3% over the next 12 months. That’s a full 0.5% higher than last month’s guess and the highest reading since last year’s spring training was underway. It’s also notably higher than pre-COVID expectations.

And it’s not just consumers — businesses are worried about rising prices, too, something that featured large in last week’s services sector Purchasing Manager’s Indices from both S&P Global2 (which singled out wage pressure and rising transport costs as worrisome) and the Institute for Supply Management3 (where the prices paid component rose to its highest level since February 2023). For context, that’s when the Fed was still five months (and three rate hikes) away from pressing pause.

But just like a fastball from Vince ‘Wild Thing’ Vaughn, inflation expectations can’t be expected to behave in an orderly way: It simply wouldn’t be normal for inflation-weary consumers to suddenly become (and remain) comfortable with the pace of price growth in linear fashion. That’s always true, but perhaps even more true today given all the rhetoric surrounding the potential inflationary impacts of trade and immigration policies being advertised by the incoming administration — something that was evident in last week’s Fed minutes in which participants at last month’s FOMC meeting admitted that the political environment was creating an unusually wide range of potential outcomes for variables like growth and inflation that makes the business of forecasting the direction of the economy even more difficult than it already is.4

Still, one of the reasons that we’ve long held that inflation data alone probably isn’t nearly as important to markets today as it was in the recent past is that economic variables — inflation expectations included — rarely move in a straight line. If inflation is at least generally moving in the right direction, policymakers at the Fed (and therefore markets) probably don’t need to worry too much about a single month’s uptick in survey data when deciding what to do next.

But there’s a big enabling factor, too. Remember that the Federal Reserve has two equally important mandates: One, keeping inflation under control, and two, creating an environment that encourages the U.S. economy to run at or near full employment. These competing goals are often at odds with one another, but when they’re not — like today, when the labor market seems to be doing mostly fine on its own despite a still-restrictive monetary stance — it can change the math.  That’s why Friday’s non-farm payrolls report, which saw payrolls climb to a much-better-than-expected 256,000 new jobs in December and unemployment unexpectedly drop to 4.1%, was widely seen as bad news: It allows the Fed to focus more intensely on the inflation side of the equation than on jobs, which might imply higher-for-longer on rates in a way the market didn’t expect.5

As usual, there were signs inside last week’s labor market data-palooza that the labor market may not be quite as strong as advertised, including very timid hiring behavior by businesses as seen in Challenger, Gray and Christmas’ layoff data6 and a decidedly non-cyclical tilt to job creation that saw areas like government, health and education account for the lion’s share of job growth. ADP’s estimate of payrolls was weak, too, all of which leaves fears of an acceleration to the downside for labor markets very much in play for those of us who tend to always see the economic glass as half-empty.

For now, though, we’ll take comfort in the fact that even if all these unknowns are keeping markets as sloppy as a late-season nor’easter and as chilly as a polar vortex, it won’t be long before the boys of summer are back at it. We’ll all be sipping cold iced tea and smelling fresh-cut grass before we can blink and say “monetary accommodation.”

What to watch this week

If there was one message to take from the paragraphs above, it’s that inflation might be on the verge of making a big comeback in its ability to single-handedly write the market narrative. Turns out we won’t have to wait long to see which direction the pitch might break, either: Producer price inflation (PPI) is due Tuesday, while the Consumer Price Index (CPI) will follow a day later. A big upside surprise in either number might reinforce fears that the Fed will be inclined to remain on pause (or, <gasp!> even start hinting at a mid-cycle increase in rates!). On the other hand, a big downside miss would likely be met with relief given the negative market reaction so far this year. In my view, the margin of error for a big market reaction is still pretty wide, but CPI and PPI are nonetheless still the most important thing on this week’s calendar. That’s especially true if the numbers differ wildly (i.e., more than a tenth of a percent or so on either side) from economists’ estimates.

A close second on the list of what to watch this week is earnings. Sorry for the false start last week, but it now looks like fourth quarter earnings season will jump off to its proper start on Wednesday when four big banks (Citi, JPMorgan, Bank of New York and Wells Fargo) all release results for 4Q and calendar 2024. They’ll be joined by a host of regional banks later in the week (where any hint of economic turbulence might be likely to appear sooner and more forcefully than with the big banks,) as well as asset managers BlackRock and Charles Schwab. Both Schwab and BlackRock are massive financial institutions in their own right, but might prove even more interesting if analysts are able to read between the lines of their quarterly results to tease out the level of risk tolerance across the market as the environment continues to evolve. Watch, for example, for any indication that institutional and retail clients are following Warren Buffet’s lead by parking massive wads of cash on the sidelines.

Beyond banks and brokers, watch for color commentary on the state of the AI play — and the geopolitical mood — when chipmaker Taiwan Semi announces results on Thursday. As Nvidia’s difficult performance in the wake of a reportedly underwhelming product announcement at last week’s Las Vegas Consumer Electronics Show showed, investors are looking for more reasons to be enthusiastic about the state of the tech business than simply recycled optimism from 2024. Hopes are high that this quarter’s tech earnings — which kicks off with TSMC this week — might be able provide it. Look also for home builder KB Homes on Monday for a read into the mood of the home-buying public, and trucker JBHunt — who’s executives rarely mince words about the health of the transportation industry — on Friday.

Returning to scheduled releases, watch Tuesday’s small business sentiment report from the National Federation of Independent Businesses for any sign at all that post-election optimism is starting to wane. This survey saw perhaps the biggest change in direction of all surveys of business confidence following election day on hopes that a more favorable tax, trade, and regulatory regime might benefit the small business sector enormously. If that optimism begins to fade, you’ll probably read it there first.

Finally, we’ll get our first two regional Fed manufacturing reports on Wednesday (in the form of the New York Fed’s Empire Manufacturing survey) and Thursday (with the eponymously-named Philly Fed). Couple these with Friday’s industrial production/capacity utilization release, and you’ll have a better understanding of how trends in the goods-producing sector of the economy are shaping up as 2025 gets underway. Recent data suggests manufacturing is clawing its way back to neutral, and an endorsement of that view by these releases would be most welcome. Meanwhile, though, the above-mentioned refocusing on inflation might make the prices paid/prices received lines from these and similar reports as the real items to watch.

Get financially happy.

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1 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html

2 https://www.pmi.spglobal.com/Public/Home/PressRelease/4d403cd9cf6a4d23a34ba46869ef0914

3 https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/december

4 https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20241218.pdf

5 https://www.bls.gov/news.release/pdf/empsit.pdf

6 https://omscgcinc.wpenginepowered.com/wp-content/uploads/2025/01/The-Challenger-Report-December-2024.pdf

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Tom Nun, CFA

Contributor

Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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