A review of January’s data shows signs of improvement and optimism the expansion will continue in the near term.

The consumer remains solid

Consumer confidence for January came in at 131.6 which continues to remain near all time high levels and leading to retail sales numbers beating expectations.

Strong Labor Market Continues

Consumer confidence is high in part because the labor market is strong. 225K jobs were created in January (well above expectations of 163K), the Unemployment rate ticked up a bit (chart above) to 3.6% from 3.5%. This has to do with people coming off the sidelines and entering the work force. The UE rate remains at levels not seen in decades.

Weekly unemployment claims also remain near multi-decade lows. Thursday's reading came in at 202K (chart above), which is near the low for this expansion.

On the small business front, confidence has softened a bit over the last two years but still remains well above most readings during the entirety of this expansion.

The January ISM Manufacturing reading came in above expectations at 50.9. This is the first reading above 50 since July 2019. The report noted sentiment and optimism improving. The Services ISM came in at 55.5, making the weighted average ISM turn upwards (chart above). The reports noted the readings correspond to GDP growth of 2.4% annualized.

The St. Louis Fed Financial Stress Index continues to make fresh lows for this expansion.

Despite the improving data, the 10 year treasury rate fails to catch a bid. The 3 month/10 year yield briefly inverted again this week. The Fed may need to cut rates again but the question is will they be willing to do this when the data is improving?

The bright side of lower rates are higher valuations. Even though the forward PE is at the high for this expansion, when we adjust for interest rates the equity risk premium looks as attractive as it was in late 2018 (when the S&P 500 was trading around 2600). Stocks aren’t expensive when adjusted for interest rates.

Conclusion

A review of January’s data shows signs of improvement in the manufacturing sector and a continuation of the upward trade for the consumer. Signs of improving sentiment and optimism bodes well for a continuation of the expansion. It’s impossible to tell how much of this is already priced into the market at almost 19X forward earnings. But the bar remains low as long as interest rates remain depressed.

The inversion of the 3 month/ 10 year treasury yield may put pressure on the Fed to cut rates again this year. But it could be a difficult decision to cut rates when the data is improving. It will be interesting to see how it plays out.