Softer Inflation and the Labor Market

Good Afternoon. A volatile but essentially flat week for the markets, driven by mixed macroeconomic data. Especially the softer-than-expected CPI numbers helped stocks rally last two days of the week. This, coupled with a weakening labor market and an unemployment rate of 4.6%, raises hopes for two rate cuts (instead of one per dot plot) next year. More on this below —

Below are the key things to note this week:

Softer than expected CPI:
Consumer prices rose 2.7% over the 12 months ending in November, materially below our 3.1% expectation. Core inflation also undershot, rising 2.6% year over year versus our 2.9% forecast. However, several technical factors affected this data release, so we need to exercise caution. Below are some of the factors impacting November CPI numbers:

• Delayed & incomplete data distorted the CPI, with October prices missing and November filling gaps.

• Timing bias from late-November data capture coincided with widespread discounts, pulling prices lower.

• Holiday sales effects likely exaggerated short-term disinflation.

• Shelter and rent issues artificially softened a key component of the CPI.

  
  

Unemployment Rate Up:

Unemployment continues to trend higher, reinforcing signs of a cooling labor market rather than a sudden break. While month-to-month data remains noisy, the broader signal is one of easing labor tightness and fading wage pressure.

• Unemployment rate has risen to ~4.6%, the highest since the post-pandemic recovery.

• Job gains remain weak on a trend basis, with the 3-month average near stall speed.

• Wage growth has slowed to ~3.5% YoY, easing labor-driven inflation risks.

• Job creation remains narrowly concentrated, with cyclical sectors under pressure.

• Recent prints likely distorted by survey disruptions, butthe directional signal is clear.

Buy the dip:
This year saw the continuation of buy the dip mentality with any drawdowns since April were short lived.

This is not surprising as the double-digit gains for the year were supported by strong earnings instead of multiple expansion:

JP Morgan Asset Management

For the week:

• The S&P 500 is up 0.10%, the Nasdaq is up 0.48%, and the Dow 30 is down 0.67%.

  

  Barchart

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Liquidity:

• Banking Reserves + ON RRP: Banking reserves remain at approximately $2.9 trillion. ON RRP balance remains immaterial.

• Standing Repo Facility (SRF): The SRF balance as of Dec 12 is almost zero.

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for Jan 28th FOMC Meeting:

CME FedWatch

The Fed’s relief for Goldman: The Federal Reserve has terminated consent orders against Goldman Sachs and Metropolitan Commercial Bank, closing enforcement actions tied to Goldman’s alleged involvement in the 1MDB scandal and MCB’s MovoCash prepaid card program, which was alleged to be fraud-ridden. Read

Japan raises rates to 3 decade high: Japan’s central bank raised short-term rates to a three-decade high, triggering a sell-off in government bonds, while signaling readiness to tighten further as policy normalization continues. The Bank of Japan lifted benchmark rates by 25 basis points to 0.75%, the highest since 1995, and in line with economists’ expectations. Read

TikTok’s US JV: TikTok CEO Shou Zi Chew told employees that the company’s U.S. operations will be placed under a newly formed joint venture. The entity, TikTok USDS Joint Venture LLC, has signed agreements with managing investors Oracle, Silver Lake, and Abu Dhabi-based MGX, with the transaction set to close on January 22. Read

The OCC relief for Citi: The Office of the Comptroller of the Currency lifted part of Citi’s compliance burden tied to long-standing deficiencies in data quality, risk management, and internal controls. The agency withdrew a 2024 amendment to the consent order that had required Citi to submit a resource review plan detailing financial, human, and technology commitments toward the 2020 consent order and identifying remediation shortfalls. Read

Treasuries Gain: US Treasuries posted their first weekly gain since late November, as softer inflation and rising jobless claims reinforced expectations of at least two Federal Reserve rate cuts next year. Despite a Friday uptick in yields, the 10-year fell four basis points on the week, while the policy-sensitive two-year dropped by a similar margin as markets priced a more dovish 2026 path. Read

Micron Beat: For the period ending Nov. 27, Micron reported adjusted EPS of $4.78 on revenue of $14.34B, up 57% year over year. Adjusted operating income totaled $6.42B, while operating cash flow reached $8.41B, versus $3.24B a year ago. Consensus estimates had called for $3.95 in EPS on $12.95B of revenue.

Accenture Beat: For fiscal Q1 ended Nov. 30, revenue rose 6% Y/Y to $18.74B (5% in local currency), while GAAP EPS increased ~10% Y/Y to $3.94, with both exceeding expectations. New bookings for fiscal Q1 2026 totaled $20.94B, up 12% in U.S. dollars and 10% in local currency versus fiscal Q1 2025.

Cintas Beat: Q2 GAAP EPS came in at $1.21, beating estimates by $0.02. Revenue reached $2.8B, up 9.4% Y/Y, exceeding expectations by $30M. Full-year revenue guidance was raised to $11.15B–$11.22B from $11.06B–$11.18B, while diluted EPS guidance was lifted to $4.81–$4.88 from $4.74–$4.86.

Nike Beat: Q2 GAAP EPS came in at $0.53, beating estimates by $0.16. Revenue totaled $12.4B, up 0.4% Y/Y and $190M ahead of expectations. Wholesale revenue rose 8% to $7.5B on both reported and currency-neutral bases, while NIKE Direct fell to $4.6B, down 8% reported and 9% currency-neutral. Gross margin declined 300 bps to 40.6%.