Not Hot Enough to Hike, Not Weak Enough to Cut

[Andrew Postell]

Economic data this morning reinforced the same theme markets have been grappling with all week: cooling but not collapsing. The University of Michigan's January sentiment reading inched higher for a second straight month, signaling modest improvement, but confidence remains deeply depressed versus a year ago as consumers continue to cite high prices and a softening labor market. Importantly for rates, inflation expectations edged lower on the one‑year horizon but stayed elevated on longer‑term views, suggesting consumers feel some near‑term relief without being fully convinced inflation is beaten. Meanwhile, S&P Global's flash January PMI data showed the U.S. private sector still expanding, led by manufacturing, though at a subdued pace. New orders and employment remained soft, pointing to slower forward momentum even as activity stays above recessionary levels.

Markets spent the week digesting this “steady‑but‑slowing” backdrop. Treasury yields were volatile early but finished little changed, with the 10‑year ending near the mid‑4.20% range after briefly pushing to recent highs. The front end remained anchored as traders continued to push back expectations for near‑term rate cuts, while mortgage‑linked assets saw pockets of relief as rate volatility cooled. Overall, the week reinforced the idea that higher yields may persist, but downside growth fears have not materialized enough to force the Fed’s hand.

Looking ahead, attention shifts squarely to next week’s Federal Reserve meeting. Markets are overwhelmingly expecting the Fed to hold rates steady, framing the decision as a pause to assess cumulative progress rather than a pivot toward renewed easing. Inflation is moving in the right direction, but growth and labor data remain resilient enough to justify patience. The key will be Chair Powell’s tone: whether he emphasizes optionality and data dependence, or signals growing confidence that policy can gradually move toward neutral later this year. For now, the data argues for comfortably waiting — not urgently cutting.

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