Fed Watch – 2/6/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello everyone, welcome to the February 6th edition of FedWatch and I’m a new face for you here this week. This is Connor Lokar, senior forecaster and keynote presenter here with ITR Economics. I’m gonna be covering for Lauren this week to check in on everything that we’ve seen since Lauren shared with you folks last week that we did have the new Fed Chair pick anyway, announced Kevin Warsh and she already covered that for you last week. But one of the things that I wanted to take a look at here is really just looking at how the bond market reacted in the weak sense. And so far, when it comes to the bond market, no news is good news. At the time of her recording, we saw 10-year treasury yields living in that high four and a quarter range, 4.27, 4.28. And that’s the range that we’ve traded in here this week, so it would seem at this point anyway, that the bond market does not seem overly disturbed one way or the other at the announcement.

Now, of course, it is early days here. We’re gonna have to see Mr. Warsh clear the Senate Finance Committee before he makes way to the Senate floor for a vote. So long way to go there early days and that’s something that I’m sure we’ll be keeping an eye on here in the following weeks. But something exciting for us at ITR in the first week of a month is we always get a fresh batch of some of our monthly leading indicator updates. And we didn’t see anything too, too exciting there. Some of our proprietaries that you subscribers are familiar with, our ITR leading indicator, our ITR retail sales leading indicators had a couple of very mild and negligible ticks downward, so still maintaining a general upward ascent that is going to be supportive of our outlook anyway of generally modestly rising cyclical conditions from a macroeconomic standpoint this year. But something that was a little bit exciting is we saw a pretty significant pop in the PMI, which for those not familiar is your USISM purchasing managers index, which is one that’s been a little bit up and down, I’ll say for us over the last couple of years has maybe fallen a little bit lower on our usual favorites list. But the reason I bring it up is that we saw a statistically relevant jump in the January PMI reading where we saw that it jumped all the way up to 52.6, which was actually the highest raw monthly reading in about 40 months and a nice rate of change increase as well and to boot, it’s the first time above 50, which for that diffusion index is a relevant tideline that we generally want to see that above and that’s the first time since January of last year. Now, what was more impressive to my mind of that particular data point was that it was not driven solely by the pricing contribution to that data point, but also the new orders component which jumped all the way up to 57.1, which was a 46 month high.

In other words, that is the highest new orders component reading for the PMI since early 2022, all the way back at the top of the business cycle and that business cycle surge coming out of 2021 into early 2022, that of course was so prolific coming out of the shutdown and supported by a lot of stimulus and pent up demand along the way. Now that is notable because that’s showing some flashing positive demand signals for us.

So within the context of our, not just macroeconomic expectations for rising demand pressure this year, but also inflation pressure, that continues to seem the probable path forward. December’s inflation number wasn’t all that surprising in either direction, we think setting the stage for some general upward rate of change movement here through the balance of 2026, ultimately taking us per our updated forecast into the mid 3% range from the high 2% range we find ourselves in currently by the time we get to the end of this year. And so that’s something that we’re gonna continue to track whether it is Kevin Warsh or whoever else leading the Fed in the future, we continue to argue that the macroeconomic backdrop is going to make it difficult for the Fed to find more rate cuts under the couch cushions, if you will. So we’re continue to maintain our expectations that we are unlikely to see much lower movement as far as the data is concerned, which is the world that we like to live in. And we’re not likely to see a whole lot of interest rate relief on. the short end or the long end, which as I mentioned off the jump, you’re still lingering in that four and a quarter range. So something else that you’re gonna keep your eyes out for. So for you Trends Report subscribers, we did lower our housing market expectations specific to the single family side. In our latest release, some of you, I’m sure you’ve already seen that. So obviously we are not of the opinion that there is some interest rate, mortgage rate, declining savior coming riding over the hill to save the housing market. In fact, we are concerned with some overbuilding and excess inventory there. So those of you that care about housing, if it affects your business, we have some less optimistic views here for 2026.

And we’re thinking that growth isn’t gonna show back up for that particular market until we break into 2027 and 2028. So that’s all I have for you here today folks. So it’s a pleasure to fill in for Lauren and she will be back with you next week for the latest edition of Fed Watch. Thank you so much.