Below are the economic and market highlights for the week:
- Output continued to expand in January while inflationary pressures increased. The Flash US PMI Composite Index hit 52.4, down from December’s 55.4. Numbers above 50 indicate expansion while those below signal contraction. The decline was driven by a slowdown in the services economy as output rose at the slowest rate since last April. On the manufacturing side, output rose marginally to push the S&P Global US Manufacturing PMI to 50.1 as factory production and new orders rose. Inflation, however, continued to rear its ugly head as both input costs and average selling prices increased at their fastest rates in four months on higher raw materials and labor costs. Despite the headline drop in output, business optimism remains high for lower taxes, looser regulation, and heightened protectionism.
- Buying homes in December was on consumers’ holiday shopping lists. Existing homes sold at a seasonally adjusted annual rate of 4.24 million, their fastest pace since February. The increase came despite a 6% Y/Y rise in the median sales price to $404,400. Winter is typically the slowest time of year for home sales but buying momentum seems to be building as sales have climbed y/y for three straight months. Rising inventory has helped with 1.15 million homes on the market, up 16.2% from the year ago period. Homebuying looks likely to continue to pick up as the typically busy spring and summer buying season is around the corner.
A Fast Start to a Second Term
The Trump administration wasted no time in getting down to business in its inaugural first week in office. Wielding his pen on his first day back, Trump signed a flurry of executive orders on tackling international trade, energy, and defeating inflation to bring down the cost of living. On his second day back at the helm, Trump announced the $500 billion Stargate project to build artificial intelligence infrastructure in the U.S. The venture will bring together ChatGPT maker OpenAI, global tech investor SoftBank Group, and database company Oracle. The move gave yet another tailwind to the AI trade which has captivated Wall Street for much of the past year. The flood of announcements out of the oval office drowned out the week’s otherwise positive economic data and earnings results as investors looked eagerly ahead to Trump’s second term in office. For the week, all three major indices advanced more than 1.50%.
Optimism is running sky high on the Street that the Trump administration will deliver on tax cuts and deregulation, opening the economy to even greater economic growth. It is hard to see how investors are not getting ahead of themselves with trading driven by the continual flow of headlines. Markets are focused on the potential positives without weighing the potential negatives, particularly given that many details have yet to emerge on how many of these policies will be implemented and impact the economy. The administration will face its first big economic test next week when the Federal Reserve holds its first FOMC meeting of the year. On Thursday, Trump argued for lower interest rates in a virtual address to the world’s most powerful business and political leaders in Davos, Switzerland. That is a demand the Fed will find difficult to comply with after having announced in December that it would be tapping the brakes on rate cuts for the time being. Recent data continues to support the central banks’ cautiousness as output and consumer spending remain high despite firming inflationary pressures. A dovish reversal seems unlikely for no other reason than the Fed wanting to demonstrate its own independence. Traders will be sure to tune in to Powell’s post-meeting conference as he will seek to navigate monetary policy amid a fast-moving and pro-growth administration.
The Week Ahead
Stocks look to close out the month on a high note. However, the Fed’s first FOMC meeting of the year could throw cold water on the market’s month end rally. In economic news, we’ll have the first estimate of Q4 GDP and personal income and spending numbers.
Otterly Wonderful
This week, we are “diving” into a topic we hope readers will find just as irresistible and uplifting as we do. In recent news, scientists have discovered the superpowers of otters in fighting invasive species in U.S. coastal waters.
Green crabs, which are native to Europe and North Africa, have been documented in the U.S. since the 1800s. They likely arrived in the ballast of merchant ships sailing from Europe to the East Coast, according to the National Oceanic and Atmospheric Administration (NOAA). The green crab eventually made its way to coastal areas in California, Oregon, Washington, and Alaska, potentially also in ballast. They are considered one of the most invasive and destructive species in the marine environment worldwide. The species destroys seagrass habitats and outcompetes local marine life and shoreline birds for habitat and food. The crabs are hard to eradicate, highly adaptable, and have few predators. States have been spending millions of dollars to protect their waterways and shoreline ecosystems from green crabs but without much success.
It turns out that sea otters — which are listed as threatened under the Endangered Species Act — love to eat green crabs. Researchers say the otters have locally solved a problem that has plagued the West Coast for years. Marine biologists in California found that a group of otters in Elkhorn Slough National Estuarine Research Reserve, one of California’s great coastal wetlands, consumed somewhere between 50,000 to 120,000 crabs per year. This seemingly simple predator-prey interaction is revealing a new, promising avenue for fighting the crustacean invasion and restoring balance to marine ecosystems. The research was published last month in Biological Invasions which you can read here.
Ecologist Rikke Jeppesen explains that sea otters have to eat a lot to keep warm because they have fur instead of blubber for insulation. Rikke added that it’s “basically a weasel in the water. And weasels are super active. They have a high metabolism. So to sustain sea otter health and keep warm, they just need to eat a lot.” It is estimated that sea otters eat about 25% of their weight in food each day.
Sea otters were nearly hunted to extinction for their soft, warm fur during the 18th and 19th centuries, but thanks to an international hunting ban in 1911 and the introduction of the Marine Mammal Protection Act in 1972, these cute and charismatic creatures have been making a comeback. At the Elkhorn Slough National Estuarine Research Reserve, the first male southern sea otter showed up in the late 1990s. And, starting in the early 2000s, females began arriving. The Monterey Bay Aquarium released 37 sea otter pups to boost the otter population as part of their conservation efforts which you can read about here. The new study offers evidence that as the otter population has increased, the population of green crabs has declined.
To gather data for the first ever published study of the link between otter and green crab populations, researchers analyzed data on otter foraging which included watching more than 26,000 sea otter dives over the past two decades. They also counted the number of green crabs caught in traps. In the early 2000s, researchers caught as many as 100 European green crabs in one trap. Today, when they place traps in the same areas, they typically catch fewer than ten of the invaders, and they’ve stopped catching large European green crabs altogether.
In a statement released this past December, Jeppesen said, “I’ve studied green crabs in estuaries on three coasts and two continents for decades, and this is one of the first pieces of good news we’ve gotten.” We think it is otterly wonderful, too.