There were two important data points this week from January – the CPI and non-farm payroll reports. Both came in better than expected and are impactful to interest rate expectations.
Consumer Price Index (CPI)
Here are a few salient points from the January CPI report:
- Headline CPI fell to 2.4% YoY (from 2.7% in December), the lowest since September 2024.
- Shelter rose just 0.2% m/m, down from 0.4% in December — the most important shift in this report given its ~36% weighting in the CPI. Private-sector rent data (Zillow, Apartment List) has been signaling this for over a year; the BLS’s lagged methodology is finally catching up.
- Services ex-food, energy, and shelter still running ~3.4% YoY. This is the labor-intensive, demand-sensitive part of the economy: haircuts, hospitals, restaurants, auto repair.
- Gasoline down 7.5% YoY, providing a household-level tailwind.
You can see how the CPI and the Core CPI have trended lower since last summer in the graphic below. If we continue on this path then the Fed has room to cut further.
The next graphic is from a website called Truflation which tracks their own version of the CPI. However, they use real-time data from a basket of goods and services (15mm data points). They have been pretty accurate with their CPI data and they lead the official CPI by about 45 days. As of Friday, their measure is below 1% and down from 1.55% last month so that is a sign pricing pressures are headed in the right direction. Below is a composition of the data they collect which differs somewhat from the BLS’s CPI.
The Jobs Data for January and the 2025 Revision
Nonfarm payrolls rose 130,000 in January — a modest headline, but the real story is the massive downward benchmark revision that rewrote 2025’s labor market narrative. The unemployment rate also ticked down to 4.3% from 4.4%.
- The March 2025 employment level was revised down by 898,000 jobs (seasonally adjusted), or -862,000 not seasonally adjusted — the largest benchmark revision since the pandemic period.
- Total job growth for all of 2025 was revised from +584,000 to just +181,000, which works out to roughly +15,000 per month on average.
- That means the labor market was far weaker in 2025 than real-time data suggested — the economy was essentially not adding jobs on a net basis for much of the year which justifies the Fed’s most recent rate cuts.
The Yield Curve
You can see a picture of the yield curve across all tenors below. The blue line is as of Friday and the light grey line is from one year ago and you can see how much the curve has steepened and shifted lower and to the right (bull steepner). The curve is likely to continue steepening via the front end coming down if growth and inflation improve.
The question is whether the back end cooperates or whether fiscal supply concerns and residual inflation uncertainty keep the 10-year sticky. Let’s not forget the political pressure to cut rates as the amount of federal debt puts a lot of pressure on Congress to keep taxes and spending in check. I don’t anything happens until we get a new Fed Chair (May 15) and we should see hearings on Kevin Warsh soon which will be very closely watched by global markets.
The S&P 500 Chart
In the upper right hand corner of the chart below you can see that not much has changed. The S&P continues to trade in a range since last October just below the 6975 resistance I posted about last year (yellow line).
Under the hood, investors are re-allocating money away from the technology stocks and into energy, consumer staples and industrials which are defensive sectors. For now, we are working off an overbought condition that was achieved on the RSI last Fall and we may need additional consolidation for a breakout above resistance at 6975. A re-test down to 6500 would also not be a shock to get buyers interested again. Stay tuned!
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Paul J McCarthy III CFA
President, Kisco Capital
