The first week of February was eventful on several fronts. The partial government shutdown, which began over the weekend, ended on Tuesday as the House managed to pass the requisite spending bills. Funding for the Department of Homeland Security was provided by a 2-week continuing resolution - which expires on February 13th - as both parties continue to negotiate the details of the department’s funding. Despite the positive news, financial markets had a tough week, with the S&P 500 down 0.7% as of the time of writing, owing in part to investor concerns regarding the impact of AI on existing business models.

On the economic data front, the ISM Purchasing Manager Index (PMI) reports showed a substantial uptick in manufacturing activity in January (Chart 1). However, survey respondents noted that this was at least partly owing to post-holiday inventory replenishment and front-loading activity ahead of potential new tariffs on Europe and other nations. The services PMI also pointed to growth in activity in January, although the acceleration recorded in recent months eased. On aggregate, these reports suggest economic activity remained on a solid footing to start the new year.

Our ability to see if this translated to the labor market in January was delayed by a week owing to the shutdown, with the Bureau of Labor Statistics pushing the release of the employment report to next Wednesday (originally scheduled for February 6th). However, we did receive the Job Opening & Labor Turnover report on Thursday, which showed a sharp drop in the job opening rate in December (Chart 2), particularly among white-collar sectors. The slowdown in the labor market has been a key concern for the Federal Reserve and provided the main rationale for the three “risk management” rate cuts implemented by the FOMC last year. Next week’s employment report will be watched closely, with a healthy addition of 70k jobs currently expected by consensus forecasters.

Although the next Fed meeting is still six weeks away, the Fed officials we heard from this week - including Atlanta Fed President Bostic, Richmond Fed President Barkin, and Fed Governor Lisa Cook - were broadly consistent in their view of the balance of risks between the Fed’s dual mandate. Most believed that risks to the labor market have eased, and that the persistent deviation of inflation from the 2% target is currently the greater risk. All speakers this week stated that patience was warranted to ensure that recent disinflation progress was sustained, but Governor Cook also noted that the FOMC was cognizant of the lingering risks to the labor market and would respond accordingly to the evolving risk environment.

Core CPI inflation sat at 2.6% in December, but price growth momentum dropped materially in the aftermath of the October government shutdown disruption. Further information will be available with next week’s CPI report for January, which is expected to show a modest drop in core CPI to 2.5%.