Consumer Confidence Slips, Fed Holds Rates Steady, and PPI Signals Sticky Inflation

This week’s economic data includes: (1) consumer confidence for January, (2) January 27-28 FOMC meeting, (3) Producer Price Index (PPI) Index for December, and (4) weekly initial jobless and continuing claims.

KEY SUMMARY:

Consumer confidence weakened significantly at the start of the year as consumers grew more pessimistic about current and future business conditions, the labor market, inflation, and recession risks, leading to reduced spending intentions—especially for major purchases and travel.

Consumer confidence weakened sharply in January, with The Conference Board’s Consumer Confidence Index falling to 84.5, its lowest level since 2014, driven by more negative assessments of business conditions and the labor market. The Present Situation Index declined to its weakest point since early 2021 as fewer consumers viewed current business conditions as favorable and more reported difficulty finding jobs. Expectations also deteriorated: the Expectations Index dropped to 65.1, remaining well below the recession‑signal threshold for the twelfth consecutive month, as consumers grew more pessimistic about future job opportunities and income prospects.

Declines in confidence were broad‑based across age groups, income levels, and political affiliations, although Gen Z remained the most optimistic cohort and lower‑income households the least. Inflation expectations eased only slightly, and while overall recession fears moderated, more consumers now believe a recession has already begun. Spending intentions softened, particularly for big‑ticket items such as cars and homes, though plans to buy appliances rose. Service‑sector spending intentions also weakened, continuing a shift toward more affordable activities; dining out remained the strongest category, while domestic and international travel plans continued to decline.

The FOMC held rates steady at 3.5%–3.75% as Chair Powell highlighted improving economic conditions and noted that upside risks to inflation and downside risks to employment have diminished—but not disappeared—while markets expect the next rate cut in June under his successor.

The January 27–28 FOMC meeting resulted in a 10–2 vote to keep the federal funds rate unchanged at 3.5%–3.75%, with two dissenting governors favoring a quarter‑point cut, a decision that markets had widely anticipated. Chair Powell noted that the economic outlook had improved since December, citing stabilizing unemployment alongside still‑elevated inflation, and emphasized that both inflation and employment risks had lessened but not disappeared. He offered no guidance on the timing of future cuts, reiterating that policy adjustments would depend on incoming data. With Powell’s term ending in May, markets expect no additional cuts during his remaining meetings and currently anticipate the next 0.25% cut in June under his successor. Powell declined to comment on future threats to the Fed’s independence or his post‑chair tenure but underscored his commitment to defending the institution’s independence.

Wholesale prices rose more than expected in December, driven by broad increases across services and core goods, while year‑over‑year inflation held at 3.0% and core and super‑core measures accelerated—signaling persistent underlying price pressures despite declines in food and energy.

Wholesale prices rose sharply in December, with the Producer Price Index increasing 0.5% month‑over‑month, its highest reading since September, driven largely by higher service costs, especially trade services. Year‑over‑year, the PPI climbed 3.0%, exceeding expectations and signaling potential upward pressure on inflation as businesses pass through tariff‑related costs. Goods prices overall were flat as declines in food and energy offset increases in core goods. Notable drops occurred in vegetable and egg prices, while energy prices fell sharply due to a steep decline in diesel fuel. Core goods prices strengthened, supported by categories such as household appliances and textile furnishings.

Service‑sector inflation accelerated, rising 0.7% and reaching its highest level since July, with trade margins accounting for most of the monthly gain. Transportation, warehousing, and other service categories also contributed to the increase, with machinery and equipment wholesaling, food and alcohol retailing, and airline services showing particularly strong price gains. Core PPI (excluding food and energy) rose 0.7%, while super‑core PPI (excluding food, energy, and trade services) increased 0.4%, both outpacing expectations. On an annual basis, core and super‑core PPI rose 3.3% and 3.5%, respectively, with several key components feeding directly into the PCE Price Index—most notably strong increases in portfolio management and airline services, while medical‑care‑related services saw more moderate inflation.

Initial jobless claims ticked down to 209,000 while continuing claims fell to 1.827 million, with both measures and their four‑week averages reinforcing the image of a stable labor market with no signs of rising unemployment pressures.

Initial jobless claims edged down by 1,000 to 209,000 for the week ending January 24 – slightly above expectations but below the level from the same week last year – while the four‑week moving average rose modestly to 206,250, signaling continued labor‑market stability. Continuing claims fell to 1.827 million for the week ending January 17, their lowest level since September 2024 and below both market expectations and the prior week’s revised reading; the four‑week average also declined to 1.868 million, reinforcing the overall picture of a steady labor market with no emerging signs of rising long‑term unemployment.

Equity markets finished the week mixed—pressured by a historic plunge in precious metals, divergent tech earnings, and resilient economic data—while Treasury yields slightly steepened and markets shifted expectations toward Fed rate cuts in June and October 2026.

Equity markets delivered a mixed performance for the week, with most major indexes posting modest declines except for the S&P 500, which eked out a small gain. A sharp Friday sell‑off capped an otherwise positive month for January, driven by a historic plunge in precious metals after President Trump nominated Kevin Warsh—widely viewed as a monetary policy hawk—to succeed Chair Powell. The announcement strengthened the U.S. dollar, lifted bond yields, and triggered a dramatic unwind of the debasement trade (an investment strategy where investors buy tangible, finite assets like gold or real estate that preserve wealth against inflation and currency devaluation), sending silver down 31% and gold down 11% in their steepest declines since 1980. Tech earnings further contributed to market divergence: investors rewarded companies like Meta, which offered strong AI‑driven guidance, while punishing Microsoft for softer‑than‑expected Azure revenue projections. Strong economic data, including hotter wholesale inflation and persistently low jobless claims, also dampened hopes for near‑term rate cuts.

In the Treasury market, yields were relatively stable before ending the week with a slight steepening, as long‑term rates ticked higher and short‑term rates slipped—reflecting expectations that a Warsh‑led Fed may prioritize inflation control while maintaining a tighter balance‑sheet stance. Market expectations for rate cuts shifted as well: investors now anticipate reductions in June and October 2026 rather than July and December, with no cuts projected for 2027. If realized, the federal funds upper bound would decline from 3.75% to 3.25%.

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DETAILED ANALYSIS:

Consumer Confidence – January Update:

The Conference Board reported that its Consumer Confidence Index (CCI) fell 9.7 points to 84.5 in January, the lowest level since May 2014 (82.2). This drop reversed the increase seen in November, when the index rose to a revised 94.2, and it came in below market expectations of 91.0. The decline was driven primarily by more pessimistic views of business conditions and the labor market. On a year‑over‑year basis, the CCI fell 20.8 points in January, following a 15‑point decline in December.

Present Situation Index

The Present Situation Index, which reflects consumers’ views of current business and labor market conditions, fell 9.9 points to 113.7, marking its lowest level since February 2021. The decline was driven by a shift in sentiment toward current business conditions, with a 1.9‑percentage‑point drop in the share of respondents describing conditions as “good” and a 0.2‑point increase in those calling them “bad.” Assessments of the job market also deteriorated: the labor market differential narrowed to 3.1, as the share of consumers saying jobs are plentiful fell to 23.9% while the share viewing jobs as hard to get rose to 20.8%. This indicator—closely watched by markets—now stands at its weakest level since February 2021.

Expectations Index

The Expectations Index, which gauges consumers’ short-term outlook for income, business, and labor market conditions, fell 9.5 points to 65.1 – the lowest level since April – and remained below the recession signal threshold of 80 for the twelfth consecutive month. Consumers’ outlook on the labor market deteriorated further, with more expecting fewer job opportunities in the next six months and expressing concerns about income prospects.

Demographics and Income Trends

Confidence declined across all age groups in December, though consumers under 35 remained more optimistic than older groups. In January, confidence continued to trend downward across all generations, with Gen Z remaining the most optimistic group surveyed. By income, confidence weakened across nearly all brackets, with households earning under $15,000 remaining the least confident. Confidence also fell among higher‑income households, which have been key drivers of strong spending. Across political affiliations, confidence declined as well, with Independents showing the sharpest drop.

Inflation and Recession Sentiment

Inflation remains a top concern, although 12‑month median price expectations eased slightly to 4.4% in January from 4.5% in December. While recession fears have moderated overall, the share of consumers who believe a recession is “somewhat likely” declined, whereas the share who believe a recession is “very likely” ticked back up. Additionally, more consumers now believe a recession has already begun.

Spending and Purchase Plans

Consumers grew more cautious about big‑ticket purchases over the next six months:

• Autos: Overall auto‑buying plans were flat. New‑car purchase intentions dipped, while interest in used cars increased.
• Housing: Overall housing‑purchase plans declined. New‑home buying plans fell, whereas plans to purchase existing homes rose.
• Appliances: Overall plans to buy appliances increased.

Used cars, TVs, and smartphones remained the most popular anticipated purchases.

Planned spending on services softened in January. The shift seen throughout 2025 – toward affordable entertainment and essential services and away from costly discretionary activities – continued into the new year. Restaurants, bars, and takeout remained the top planned service‑spending category and continued to rise, while vacation plans continued to fall for both domestic and international travel.

January 27-28 FOMC Meeting:

The FOMC voted 10–2 to hold its benchmark interest rate in a target range of 3.5%–3.75%. Fed Governors Stephen Miran and Christopher Waller dissented, favoring a quarter‑point rate cut. The decision was widely anticipated by financial markets, which showed little reaction.

In his post‑meeting remarks, Chair Powell noted that the economic outlook has clearly improved since the December meeting, citing job gains alongside an unemployment rate showing signs of stabilization, as well as still‑elevated inflation. He added that upside risks to inflation and downside risks to employment have diminished, though they have not disappeared.

Neither Powell nor the post‑meeting statement provided any indication of when the next rate cut might occur. He reiterated that the timing and extent of any additional policy adjustments will depend on incoming data and the evolving economic outlook.

Chair Powell’s term ends in May, meaning he will preside over the March and April meetings. Given the improving economic backdrop and a stabilizing labor market, markets currently expect no further rate cuts during his remaining tenure and anticipate a 0.25% cut in June, when Powell’s successor will lead the June 16–17 meeting.

Powell declined to answer most questions regarding potential threats to Federal Reserve independence or whether he plans to remain on the Board of Governors after his term as Chair expires. However, he emphasized his commitment to defending the Fed’s independence, calling it “an institutional arrangement that has served the people well.”
PPI – December Update: 

The Bureau of Labor Statistics (BLS) reported that the PPI rose 0.5% month‑over‑month in December, following a 0.2% increase in November. The gain – driven largely by higher service prices, particularly trade services – exceeded market expectations of a 0.2% increase and marked the strongest reading since September. On a year‑over‑year basis, the PPI increased 3.0%, unchanged from November and above the consensus forecast of 2.8%, suggesting that businesses may be passing on tariff‑related cost pressures and that inflation could be firming.

Goods Prices

Prices for goods (including food and energy) were unchanged in December after a 0.8% increase in November, as rising prices for core goods (excluding food and energy) offset declines in food and energy. Food prices fell 0.3%, driven by steep drops in fresh and dry vegetables (-20.4% MoM; ‑5.9% YoY) and eggs (‑4.9% MoM; ‑48.3% YoY). Energy prices declined 1.4% following a 3.7% increase in November, led by a 14.6% drop in diesel fuel. Core goods rose 0.4% after a 0.2% November gain, with notable contributions from textile house furnishings (+1.9% MoM; +5.9% YoY), household appliances (+1.1% MoM; +4.3% YoY), and costume jewelry and novelties (+4.9% MoM; +9.2% YoY).

Services Prices: 

Service prices rose 0.7% in December, up from flat in November and the highest since July, driven by a 1.7% increase in trade service margins, which accounted for two‑thirds of the monthly gain and reached their highest level since June 2024. Transportation and warehousing services increased 0.5%, and services excluding trade, transportation, and warehousing rose 0.3%. Over 40% of the overall increase was due to a 4.5% rise in machinery and equipment wholesaling margins. Additional contributors included food and alcohol retailing (+3.5%), health/beauty/optical goods retailing (+4.2%), portfolio management fees (+2.0%), airline passenger services (+2.9%), and traveler accommodation wholesaling (+7.3%).

Core & Super Core PPI

Excluding food and energy, the core PPI rose 0.7% month‑over‑month after being flat in November, far above expectations for a 0.2% increase. Year‑over‑year, core PPI climbed 3.3%, up from a revised 3.1% in November and above the expected 2.9%. The “super core” PPI—which excludes food, energy, and trade services—rose 0.4% month‑over‑month, exceeding both November’s 0.2% reading and market expectations of 0.3%. On an annual basis, super core PPI increased 3.5%, unchanged from November but slightly above the 3.4% consensus. Markets continue to closely track the seven PPI components feeding into the PCE Price Index, with strong increases in portfolio management services and airline fares, while healthcare‑related services showed more moderate price gains.

Jobless Claims – Week Ending January 24:

The Labor Department reported that initial jobless claims edged down by 1,000 to 209,000 for the week ending January 24, compared with a revised 210,000 the prior week, and slightly above market expectations of 205,000. Claims also remained below the 210,000-level recorded in the same week last year. The four‑week moving average rose modestly to 206,250—up 2,250 from the prior week’s revised 204,000—indicating continued stability in the labor market.

Continuing claims, which reflect the number of individuals receiving unemployment benefits, declined by 38,000 to 1.827 million for the week ending January 17, below expectations of 1.850 million and marking the lowest level since September 21, 2024. They also fell below the 1.849 million reported in the same week of 2025. The four‑week moving average dipped to 1.868 million from 1.875 million, reinforcing signs of a steady labor market with no emerging upward trend in long‑term unemployment.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets ended the week with slight losses, except for the S&P 500, which posted a modest gain. Despite a sharp sell‑off on Friday, markets still finished January with positive monthly returns. The week’s mixed performance was largely driven by a historic sell‑off in precious metals following the nomination of former Fed Governor Kevin Warsh, diverging earnings results among major tech companies, and resilient economic data that complicated expectations for near‑term interest rate cuts.

The most significant market catalyst was President Trump’s nomination of Kevin Warsh to succeed current Fed Chair Powell. Investors view Warsh as a policy “hawk” focused on inflation control as priority and favoring a tighter balance sheet stance, which sparked an immediate rally in the U.S. dollar and a rise in bond yields. The stronger dollar and expectations of tighter monetary policy triggered a major unwind of the debasement trade, driving a 31% drop in silver (approximately $35.90) to settle at $78.53 per ounce—its steepest decline since March 1980—and an 11% drop in gold (approximately $610) to $4,745.10 per ounce, marking its largest one‑day decline since January 1980. Speculative investors also used Friday’s move as an opportunity to take profits after the metals’ significant record‑setting run.

Tech earnings contributed further to the market’s divergence. Investors were quick to penalize strong earnings reports that lacked meaningful forward revenue momentum. Meta Platforms and Microsoft both posted solid results; however, Meta surged 10% on robust guidance supported by AI‑enhanced advertising, while Microsoft fell 12% due to softer‑than‑expected revenue projections for its Azure cloud services.

Economic data released last week added to uncertainty. Higher‑than‑expected wholesale price inflation and continued low levels of initial jobless claims signaled ongoing economic resilience—further dampening hopes for imminent rate cuts.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -0.17% (weekly) & +0.92% (YTD), closing at 23,462
• S&P 500: +0.34% (weekly) & +1.37% (YTD), ending at 6,939
• Dow Jones Industrial Average: -0.42% (weekly) & +1.73% (YTD), closing at 48,892
• Russell 2000: -2.08% (weekly) & +5.31% (YTD), ending at 2,613

Treasury Market Update

Treasury yields were relatively steady for most of the week, ending with a slight sell‑off in longer‑term maturities, while short‑term yields declined. The moves were driven largely by the nomination of former Fed Governor Kevin Warsh as the next Fed Chair. This dynamic contributed to a modest steepening of the yield curve compared to the prior week:

• 2-year yield: 3.52% (-0.08%)
• 5-year yield: 3.79% (-0.05%)
• 10-year yield: 4.26% (+0.02%)

Rate Cut Expectations

Unlike last week—when markets anticipated rate cuts in July and December 2026—this week they expect cuts in June and October 2026. No cuts are projected for 2027. If implemented, the two reductions would lower the federal funds rate’s upper bound to 3.25%, down from the current 3.75%.

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For a visual representation of this week’s economic review, you can view or download the slide deck here:01.30.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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