The main element on the economic calendar that the markets could latch on to this week is Wednesday’s release of the minutes of the last FOMC Minutes meeting. There’s been a lot of data released that could allow for a new interpretation of what the Fed members have said. With the US coming back today from its extended weekend, and earnings season starting to wind down, financial markets could get more interested in the Fed.
The dollar has been suffering a bit of a push and pull with the latest data, but the result seems to be in favor of the bears, lately. Markets generally don’t like surprises, and there have been quite a bit of those lately. Additionally, markets don’t like uncertainty, and the lack of details about what will happen with tariffs could be keeping investors from jumping in. Wednesday’s minutes could provide some valuable context to bring all the pieces together.
Inflation Up, Sales Down
Markets were surprised by the strong January inflation print, coming in above expectations. This was reaffirmed when Fed Chair Jerome Powell gave his semi-annual presentation before Congress. The main takeaway from that was essentially that given the current data trends, rates would remain that the current level. There would have to be a shift in the inflation or jobs numbers before the Fed would likely move on to its next rate cut. That left the market pricing in only one rate cut for the whole of the year.
Some signs of that might have come last week, when retail sales unexpectedly fell in January. At -0.9%, it was the largest drop in consumer appetite in nearly two years. Following the results, the market shifted back, and returned to pricing in a final rate cut by December of this year. But it’s still pretty much 50-50 in the odds, with only a minor shift in the data potentially spooking the markets. This could leave the dollar a little more vulnerable.
The Details that Matter
US President Donald Trump has maintained his habit of taking shots at the Fed, and has been repeatedly saying he wants lower interest rates in order to support the economy. But, rates are staying higher out of concern that his tariffs will push inflation up. His team, however, argues that inflation will go down in the future when domestic supply increases (partially as a result of tariffs) and aggregate demand slows down (partially as a result of lower immigration).
Which side will be right is still an open question, evidently. But the relatively even split around a rate cut in June and then in December suggests that markets are not necessarily convinced either way on inflation. For example, while retail sales were lower in January, analysts pointed to the wildfires and cold weather potentially having a big impact. Also, lack of availability in products left some people simply not buying.
The Car Market?
Retail sales were lower in part to lack of supply of cars. That is, people wanted to buy, but there was not enough product. In other words, it was a lack of demand (or consumer appetite) that drove the lower retail sales. Used car prices were one of the major movers of inflation during January as well. Typically, automotive demand is higher when there is expectation of a stronger economy.
Then there is gold. Typically it moves higher when interest rates are lower. But it has been defying the rule somewhat, as investors clearly are worried that inflation will remain elevated. That means they are preferring gold over bonds, which could keep the dollar a little more under pressure for now.