Earnings season is off to a strong start. Last week the major banks reported very strong earnings, largely driven by a pickup in fees earned by advising other companies on mergers, acquisitions, and public offerings. The more important news, however, is that banks have lowered the amount of reserves for loans they expect to go bad. This is a positive development as that figure had been steadily climbing all through last year.
Inflation posted last week in-line with expectations, though still higher than the Fed would like it to be. With employment strengthening and inflation holding higher, investors are beginning to wonder how the Fed will respond.
With the inaguration today, investors will watch the Trump administration closely for clues about the regulatory regime: tariffs, bank regulations, Federal Reserve independence, and the overall business climate are all on the table. So, while this is a light data week otherwise, markets may move significantly if there are unexpected announcements.
Chart of the Week
After falling from its high of over 8%, inflation touched a low of 2.4% in 2024. The Fed had declared victory, however there are worries that this was premature. Since its low, headline inflation (which includes everything) has ticked back up and core inflation (which removes the most volatile items, like gasoline) has now moved lower. Some investors now believe the Fed lowered too quickly, and may even need to raise rates again. The next couple of months will be important to building an understanding one way or another.
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