Let's get to the big story.
Breakdown.
Will US stocks rallied Thursday after a softer than expected read on November.
Inflation, raising hopes that price pressures are continuing to ease.
CPI showed inflation cooling, but economists do caution the data may be less reliable than usual because of the government shutdown.
Now still investors are focusing on what this could mean for Fed interest rates this morning.
New York Fed President John Williams.
Saying technical factors distorted November's CPI reading.
Well, joining me to weigh in this morning is Jeff Roach, chief economist for LPL Financial.
Jeff, good morning, happy Friday, and thank you so much for joining me.
So what did you make of that CPI reading that we got out yesterday, and do you think recent market gains are showing a sustainable rally or just a bounce after a technical sell-off?
Well, it was a little bit complicated because of the, the shutdowns impacted data collection.
You know, I would say that, you know, it was, it was helpful, but don't put too much on this latest CPI report.
In fact, don't use it for forecasting purposes.
I, I would say it in that way.
However, when you look at some of the details, I think what is clear is that inflation truly is easing.
I think we have the trajectory for 2026.
In a pretty good light, our forecast is 2.5% inflation rate by the end of next year.
I don't think this latest report changes our forecasts on that, but I do think that in the very, very near term inflation metrics will indeed be bumpy.
Case in point was yesterday's release.
Yeah, and speaking of bumpy, this is the last full trading week of 2025.
Next week, markets will be closed on Christmas Day, and after that, of course, we get New Year's.
And given the fact that today is the last big liquidity event of the year with triple which expiration.
And the S&P quarterly index rebalances.
We are keeping a close eye on the markets, but at the same time, when we look ahead to catalyst for 2026, we're paying attention to the Fed.
So what are your expectations, especially given the latest non-farm payrolls and unemployment figures?
Well, I think our forecast remains that the Fed does cut at least 2 times, if not more, and that really depends on how much the labor market weakens.
I do expect unemployment rate to continue to tick up.
I look at a couple of alternative data sets, you know, the Conference Board data suggests that unemployment's going to rise a little bit.
I do think the fact that the quits numbers have declined pretty dramatically, that's suggesting that As the labor market cools, workers are less inclined to hop from one job to another.
I think those kind of underlying data series suggests that the math when I run it. tells me that unemployment's going to rise.
I think a 4.8% figure is reasonable.
And if you get that, those unemployment rates ticking higher in the coming quarters, the Fed will indeed continue to cut.
They're probably not going to move in January.
They're going to hold.
They're going to wait for more data.
We're talking the latter meetings March, April, and later into the summer.
And Jeffrey, this is the first time we're talking since the December Fed meeting took place.
Of course, we're paying attention to the dot plots, the summary of economic projections, as well as Powell's comments, but as we look ahead to next year, we're paying attention to plenty of catalysts, especially from the nation's capital.
So what does all of this mean for the US economy, especially given the big beautiful bill as well as stimulus measures.
Well, I view it in in similar fashion as some of the Fed officials in that we do think growth could be pretty decent.
I think we're going to have GDP growth around 2.1% to 2.2% on an annual basis.
I do think inflation, as I mentioned earlier, ticking downward to 2.5%.
And so that does give the Fed the opportunity to ease up.
I think what was very interesting when you look at the details of the summary of economic projections.
The Fed is very much relying on the elixir of productivity in that the only way you can have pretty strong growth, falling inflation in a very weak job market is productivity growth.
You've got to have productivity growth to make those numbers match the equation to balance, if you will.
And finally, I do want to round out our conversation by taking a look at global central banks which are splitting paths.
The Bank of England delivered a narrow rate cut after UK inflation missed expectations while the ECB held steady with inflation near target.
And overnight.
Bank of Japan raised interest rates to the highest level in 30 years, and as a result, we did see bond yields higher.
So do you think the diverging policies could create opportunities or risks for the global investors as we head into the new year?
Well, I think those diverging policies that I think will continue in 2026 will certainly create some opportunities for volatility, particularly in currency markets.
We're certainly seeing this now with the yen.
I do think that in 2026 Japan will grow as an economy.
I think from wage pressures and input costs you actually will see an uptick in inflation.
So I think that that makes sense for the Bank of Japan to continue to to hike, looking at ways to increase and tighten up monetary policy.
And indeed at the other hand, when you think about Europe.
Those economies, particularly Germany, but even in the UK, those economies had a tough go last year.
I do think they'll eke out some growth in 2026, but we should expect the European Central Bank, the Bank of England, and the Federal Reserve all work towards easing rates in contrast with the Bank of Japan continued to hike in 2026.
And last but not least, before I let you go, very quickly, I do want to ask for your forecast.
So here on Wall Street we're hearing some lofty price targets when it comes to the S&P 500, but of course when it comes to the economy, give us some of your key numbers when it comes to forecasts for 2026.
Well, 2.2% growth could be realized for the year.
We think that might be driven by things like stronger tax refunds, the fiscal stimulus from the OBBBA, and I think other aspects of a continuing strength in the consumer that's going to provide some lift in growth.
I do think that as we see growth continue, that's going to flow right into what businesses are seeing.
You know, once we also see a little more clarity in the trade situation and the tariff policies, that's certainly going to provide a little bit of those tailwinds throughout 2026.
Again, no recession next year.
That's not in the cards, and we could, we certainly could see inflation, as I said, 2.5% by the end of the year is our forecast.
I think that's providing a pretty nice Goldilocks scenario when you look at all those numbers combined.
Well, Jeff, we'll have to leave it there.
Thank you so much for joining us on this Friday morning.
Have a great weekend and have a happy holiday season.
Take care.
