Torsten Slok on Key Economic Catalysts: Fed, Consumer Earnings, and Fiscal Policy

Key Economic Catalysts for the Week

• 🎯 The Fed meeting is a primary focus, with emphasis on how the Fed communicates about the future and the weight given to inflation versus the employment part of the dual mandate.
• 💡 Consumer earnings are critical, as they will reveal more about the state of the consumer, which is a key indicator for the economy.
• 🚀 The economy is shifting from headwinds to tailwinds, including lower oil prices, a weaker dollar, and the ongoing AI and energy data center buildout.

Fiscal Policy and Economic Tailwinds

• 💰 The 'one big bill' (likely referring to a fiscal stimulus package) is expected to provide significant tailwinds for companies in 2026.
• 📈 This bill includes immediate expensing, allowing companies to write down 100% of their expenditures in the current year, boosting sectors that benefit from strong capital expenditures (capex).
• 📊 The fiscal policy is designed to be helpful for both US consumers and capex.

Interest Rates and the Fed's Stance

• ⚠️ The current market expectation is for rates to remain higher for longer, with the Fed dot plot indicating only one cut in 2026 and the market pricing in a potential hike in 2027.
• 🏦 The incoming Fed chair will face the challenge of persuading other FOMC members if they believe interest rates should be lower.
• 🌐 Globally, Japan and Europe are also seeing rising yields due to fiscal challenges, contributing to higher front-end and long rates.

Bond Market Dynamics

• 📊 US Treasury yields have moved sideways, influenced by global fiscal challenges and inflation staying higher for longer.
• 📉 The expectation is that the entire yield curve is likely to remain at elevated levels for a significant part of 2026.

Small Cap Stock Performance Concerns

• 📉 The outperformance of the Russell 2000 over the S&P 500 is concerning, particularly because the gains are driven by companies with negative earnings.
• ⚠️ This trend is unusual, as companies with positive earnings in the small-cap world have been underperforming, which is contrary to typical market behavior.
• ✅ The expectation is that with building tailwinds, all stocks and companies should benefit, making the current performance of negative-earnings companies unique and unusual.