Fed Watch – 2/7/2025

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

Hello. Today is February 7th, 2025. Welcome to this edition of Fed Watch.

This is a data ladened in month, so I broke it down into what the leading indicators are saying, and then what the coincident indicators are saying, and then what the lagging indicators are saying, and what the bond market is doing. Basically, it all boils down to the economy is healing. At least that’s what the leading indicators are telling us. Coincident indicators like non-defense capital goods, new orders, US total industrial production, they continue to be very sluggish.

In fact, new orders are negative. Employment is surprisingly resilient, and surprisingly, as in quotes, because the economy hasn’t been that bad. There is a lack of people out there, so it’s not all that surprising. Sum total of which is that we’re not seeing any moving out of the bond market to suggest that the Fed’s going to be lowering interest rates, and certainly nothing from the Fed that says that they’re going to be lowering interest rates.

Let’s take it by the numbers. Our own ITR leading indicator in January rose into positive territory for the second consecutive month, it rose higher in that positive territory. That’s something that we’ve been waiting for. It was part of the segment that had been missing. This suggests more clearly that we’re on course for improving economic conditions as we go through 2025, and that means no rate decline.

The ITR financial leading indicator stopped its decline, but it’s still in negative territory. It’s significant to us anyways that it had been rising, it eased downward a little bit. It seems to have done like a double dip and it’s coming back up. The ITR retail sales leading indicator stalled and it’s ascent in January, but it’s still in a positive trend, nothing to worry about there. And the purchasing manager’s index trended above 50 for the first time since October, 2022. So that’s a biggie. That means the confidence is spreading. And just talking to our clients, we can feel the confidence is spreading out there.

There’s obviously a lot of consternation about the tariffs. And maybe that’s going to inhibit some of the recovery in the coincident indicators like non-defense capital goods. That 12 MMT is down 8.6%. It’s not really throwing off any positive signs as yet. The 3/12 rate-of-change in a very weak position at minus 11.8%. We think we’ll see that rate of change improve going to first quarter 2025. And that’ll get this data trend that is leveling off and it should be rising in the second half of the year.

Overall, manufacturing new orders are flat. Construction machinery new orders down 9.1%. It is three months compared to one year ago. That’s consistent with the weakening we’re seeing in non-residential construction, the lack of rise really in residential construction. The rate of growth in non-residential construction at 3.0%, it’s the weakest we’ve seen in a little over three years. So that is continuing to follow the course that we thought. If the Fed wanted an excuse, they should be looking at this lagging indicator, but that’s not what economists do. We tend to look at leading indicators.

Retail sales for automobiles weren’t good at all. And the latest change from December to January, we saw nothing but weakness. There was an increase in the number, but it’s the magnitude of the rise that was just awful. It dates back to 2019, which was a bad year, and 2013, which was not a good year either.

But as I mentioned, employment for January reportedly would look strong. The overall increase in the number of jobs wasn’t all that great. Normally, we look for something 150, 155,000. Your quotes have it at 143,000, but it’s strong enough, given all the economic conditions that are going on here.

No major change in the 10-year bond yield. That dropped about 10 bips from last month. 30-year mortgage dropped a little bit down to 6.89%. For people that are waiting for it to drop back down below seven. This is their time to make the move. We continue to think there’s no great hurry between now and the second quarter. But people should surely be lining up their finances to get that squared away.

The economy is improving. So for a lot of folks, that’s great news. But that means interest rates aren’t likely to come appreciably down in the next one to two quarters. And that’s the reality that we all have to deal with.

And I hope you also set aside watching us on March 20th when we do a virtual summit of talking about what all of this means relative to our 2030 outlook, what the tariffs mean in terms of supply chains and our interpretation of how the tariffs are likely to hit different sectors. There’s a lot to unpack and all that more than we can do here in the Fed Watch. So we’ll have this virtual summit, March 20th, you can learn more about it on our website. Thank you again for watching. We’ll see you next week.