RECAPPING LAST WEEK
U.S. equity indices completed the first full week of 2026 in positive territory as investors reacted to
softer–than–expected labor market data. The S&P500 and Nasdaq Composite indices each gained
more than 1.5% while equal–weight and value themes continued to outperform. The Russell 2000
jumped 4.6% on hopes for rate cuts and a strong showing from financial stocks. For S&P500
sectors, consumer discretionary rallied 5% as retailers soared, while basic materials saw nearly
similar gains as precious metals once again approached record highs. Gold futures rose 4% and
silver spiked more than 10% in extremely volatile trading. OPEC’s decision to leave oil output
levels unchanged at a brief meeting last weekend was supportive of crude, which finished the
week higher by 2.5%. U.S. Treasury yields fell after December’s non–farm payroll growth came in
below expectations at 50,000. At the same time, the unemployment rate ticked lower to 4.4%
despite a rise in layoffs attributed mostly to federal government workers and technology
companies. Overall, the data suggested that labor demand continued to fade without rapid
deterioration, even as economic growth appeared robust. Fed funds futures still project two rate
cuts in 2026, although the first isn’t being priced in until June. In other economic news, ISM
manufacturing PMI slumped to 47.9 in December, while services PMI rose to 54.4, its highest level
since October 2024. Tariff impacts were common themes among survey respondents as the price
indices remained elevated. This month’s preliminary consumer sentiment index improved slightly
but still sat near record lows. One–year inflation expectations were flat at 4.2% while the long–
term view edged up to 3.4%. Delayed U.S. trade data revealed a deficit of just $29.4 billion in
October, down 39% from the prior month and the lowest level since 2009. The declining
imbalance could provide a much–needed boost to Q4 GDP, considering the expected negative
impact from the government shutdown. Another long–delayed report showed that U.S. worker
productivity grew sharply in Q3 as business investment in artificial intelligence depressed labor
costs. Overseas, inflation in Germany and the wider Eurozone slowed to 2% YoY last month,
rekindling hopes that the European Central Bank could resume rate cuts this year. German retail
sales fell 0.6% MoM, a sharp reversal from prior readings that raised concerns about consumer
spending. China’s CPI accelerated at the fastest pace in nearly three years, largely driven by
supply shortages of hard–to–obtain foods during the cold winter. However, producer prices
continued their deflationary streak, indicating soft domestic demand for goods.
THE WEEK AHEAD
Several interesting developments arose last week that could have a major impact on the
economy’s direction in 2026. The first was in the housing market, where the U.S. government may
move to buy mortgage bonds to bring down homebuyer costs while also banning investment firms
from buying single–family homes. Second, the U.S. government is expected to request a 50%
increase in the defense budget, to $1.5 trillion, and may look to tie defense companies’ dividends,
share buybacks, and executive pay to delivery schedules. Meanwhile, the White House stepped
up its pressure on the Federal Reserve over the weekend, while the U.S. Supreme Court is
expected to issue its next rulings on Wednesday, which could include the legality of President
Trump’s sweeping global tariffs. The flurry of news may introduce some caution among investors,
despite the overall positive start to markets this year. On this week’s economic agenda, Tuesday’s
U.S. CPI report will take center stage, flanked by other releases including retail sales, housing
data, regional manufacturing surveys, and Treasury auctions at the longer end of the curve.
Earnings season also gets underway on Tuesday, with reports from the major U.S. banks sprinkled
throughout the week along with technology giant Taiwan Semiconductor. The international
calendar is light, highlighted by China’s trade balance figures and the UK’s monthly GDP update
(Schwab)
