Week Ahead: What Signals Will Fed Minutes Send? US December Core PCE Due

TradingKey - The fourth-quarter earnings season for U.S. stocks is drawing to a close. With market participation continuing to rise, the U.S. stock market has entered a new normal with an average daily trading volume of $1 trillion. This week, investors can focus on the U.S. December core PCE Price In- dex. Relative to the Federal Reserve's target, inflation levels remain elevated. Additionally, focus can be placed on the minutes of the Federal Reserve's monetary policy meeting, where investors may find more signals regarding monetary policy.

Preview of Major Events

The Fed's monetary policy meeting minutes will be released; what signals will they send?

The Federal Reserve's monetary policy meeting minutes will be released this Thursday. Late last year, due to the combined effect of rising government borrowing and the balance sheet reduction process, funds were drained from the money market and liquidity tightened significantly. The Fed subsequently halted the balance sheet reduction and shifted to purchasing Treasury bills monthly to replenish reserves for the financial system.

Citi strategists stated that under Warsh's leadership, the Fed still has multiple paths for balance sheet reduction. Among them, the path of least resistance is to gradually roll over longer-dated Treasuries into shorter-term bonds, shortening the weighted average maturity of its holdings. Additionally, the Fed could choose to slow its current monthly pace of about $40 billion in Treasury bill purchases, or stop them entirely; it could also allow its mortgage-backed securities (MBS) holdings to roll off without reinvestment upon maturity.

U.S. December Core PCE Price Index Debuts: Will Inflation Rebound Again?

This Friday, the U.S. will release the December core PCE price index. As the Fed's preferred inflation gauge, it will be a major focus for investors. Although the rebound in core inflation has raised concerns, a weakening consumer and labor market are leading some policymakers to call for interest rate cuts.

Despite macro data showing a slowdown in inflation, prices in key sectors like food and energy continue to rise, while wage growth remains relatively slow, causing many households to feel an "affordability crisis."

U.S. January Retail Sales May Be Affected by Weak Holiday Consumption Momentum

While the stock market rally may have supported spending by high-income households, data shows that consumption among low-income groups, who primarily rely on wage growth, remains weak. The severe cold weather in late January inhibited economic activity across much of the U.S., making it difficult for economists and policymakers to accurately assess the underlying fundamentals of household demand at the start of the year.

Due to the prevalence of deep discounts during the holiday season, retail data not adjusted for inflation may be somewhat affected. Currently released retail data mainly reflects goods consumption, which accounts for about one-third of total U.S. household spending.

Selected Economic Data

Tuesday: U.S. January Retail Sales MoM

Thursday: U.S. Weekly Initial Jobless Claims for the week ending Feb 14

Friday: U.S. December Core PCE Price Index YoY

Selected Events for the Week

Tuesday: The Reserve Bank of Australia will release its February monetary policy meeting minutes.

Wednesday: 2027 FOMC voter and San Francisco Fed President Daly will speak on artificial intelligence and the economy.

Thursday: The Fed will release its monetary policy meeting minutes.