US Economy: Weekly Commentary – February 02, 2026

US Market Review

US Treasury yields rose, steepening the curve. Stocks were mixed, led by energy gains. The dollar declined. WTI surged on geopolitical risks. Gold and Bitcoin fell. Markets remain cautious.

US Treasury yields increased over the month, with long-term yields outperforming their short-term counterparts, resulting in a steeper yield curve. Break-even inflation rates widened during Warsh’s first term. Bond markets responded cautiously to Warsh’s Federal Reserve nomination, as long-term yields climbed, short-term rates declined, and investors expressed concerns that additional rate cuts could stoke inflationary pressures.

US equity markets ended the week mixed. Micro-cap and small-cap stocks declined 3.10% and 1.95%, respectively, while large-cap stocks rose 0.35%. The “Magnificent 7” advanced 0.80%. By sector, energy led the gains with a 3.80% increase, followed by communications at 2.70%. In contrast, healthcare fell 1.75%, closely followed by consumer discretionary, which declined 1.60%.

In currency and commodity markets, the US dollar depreciated 0.17% against the euro, marking a third consecutive monthly decline and trading at its lowest level against major currencies since July 2022. WTI crude oil surged 7.24% amid heightened US-Iran tensions, raising concerns over potential supply disruptions in the Middle East. Additionally, EU plans to prohibit shipping and insurance for Russian oil may constrain Russian exports, further tightening global supply. These combined geopolitical risks are driving oil prices higher. Gold declined 1.49% following a significant selloff on Friday, while Bitcoin fell 6.76%.

US Market Views Synopsis

The Fed held rates at 3.50–3.75%, signalling caution. Inflation surged, consumer confidence fell, while spending remains resilient, highlighting persistent price pressures amid a K-shaped recovery.

The Federal Reserve held its benchmark rate at 3.50–3.75% in a 10-2 vote, signalling a slightly hawkish stance amid stronger economic growth, resilient consumer spending, and stabilizing labour markets, while inflation remains above the 2% target, largely due to tariffs. Chair Powell removed prior references to employment risks and indicated updated projections will likely show firmer GDP growth and stable unemployment. Markets expect limited further easing as the policy cycle nears its end. U.S. producer prices surged in December, with headline PPI up 0.5% MoM (3.0% YoY) and core PPI up 0.7% MoM (3.3% YoY), driven by services and trade margins, signalling persistent inflation pressures. Consumer confidence fell to its lowest since 2014 amid labour, income, and business concerns, though spending remains robust among high-income households, highlighting a K-shaped recovery.

Fed Interest Rate Decision

The Fed held rates at 3.50%–3.75%. Policy leaned slightly hawkish as economic growth strengthened, inflation pressures moderated, and markets anticipated only modest further easing for Treasury yields and the dollar.

The Federal Reserve held its benchmark policy rate steady at 3.50% to 3.75% in a widely expected 10-2 vote, with Governors Stephen Miran, at his final meeting, and Chris Waller dissenting in favour of 25bp cuts. The statement and Chair Powell’s press conference conveyed a slightly more hawkish tone than in previous meetings, highlighting solid economic expansion, resilient consumer spending, and signs of stabilisation in the labour market, while noting that labour supply growth has essentially stalled. Officials removed prior references to rising downside risks to employment and acknowledged that the growth outlook has improved in recent months, even as inflation remains somewhat elevated relative to the Fed’s 2% target. Although no new forecasts were published, Powell indicated that updated projections would likely be firmer than those released in December, when 2026 GDP growth was revised up to 2.3%, unemployment was seen ending this year at 4.4%, and core PCE inflation at 2.5%, broadly in line with current market consensus. Most excess inflation was attributed to tariffs rather than underlying demand, with officials expecting these effects to fade over the year, while long-term inflation expectations remain well anchored and risks to both inflation and employment have eased. Powell emphasised that a strong labour market reduces the case for further cuts, cautioned against declaring premature victory on inflation, and reiterated the Fed’s readiness to act if either mandate deviates from its objectives. The U.S. economy was described as fundamentally solid, with pandemic distortions and government shutdown effects fading, fiscal sustainability flagged as a growing concern, and geopolitical energy risks monitored closely. Treasury yields and the dollar received modest support following the decision, though markets continue to price limited further easing, reinforcing the Fed’s signal that the policy easing cycle is approaching its conclusion.

We expect the Fed to cut rates at least once this year, with markets pricing in roughly two reductions. Inflation is not yet under control.

December PPI shocked higher. Headline rose 0.5% MoM, 3.0% YoY. Core surged 0.7% MoM, 3.3% YoY. Services and margins drove persistent inflation pressure into early 2026.

U.S. producer price inflation surged well above expectations in December, delivering an unwelcome inflationary signal as incoming Fed Chair Kevin Warsh evaluates the policy outlook. Headline PPI rose 0.5% MoM versus a 0.2% forecast, lifting the index to 3.0% YoY, while core PPI jumped a striking 0.7% MoM, more than triple expectations, pushing the core rate to 3.3% YoY, its highest level since July 2025 and one of the largest monthly increases since early 2022. The upside surprise was driven overwhelmingly by services, with final demand services prices rising 0.7% MoM, the biggest gain since mid-2024, as trade margins surged 1.7% MoM, led by machinery and equipment wholesaling. By contrast, final demand goods prices were flat MoM after a strong 0.8% gain in November, as a 0.4% MoM increase in goods excluding food and energy was fully offset by declines in food and energy prices, which fell 0.3% and 1.4%, respectively. Within goods, nonferrous metals prices jumped 4.5% MoM, while residential natural gas, motor vehicles, soft drinks, and aircraft and aircraft equipment also rose, offset by a sharp 14.6% MoM plunge in diesel fuel and declines in gasoline, jet fuel, beef and veal, and iron and steel scrap. Although energy prices dipped on the month, energy-related PPI remains elevated on a YoY basis compared with six months ago, underscoring persistent upstream cost pressures despite the sharp drop in spot energy prices.

We expect inflation to remain high as a weaker dollar, rising commodity prices, and growing strains in fiat monetary systems reinforce persistent upside risks to global price stability.

Consumer Sentiment

US consumer confidence dropped to its lowest since 2014. Labour, income, and business outlooks worsened. The K-shaped recovery continues despite resilient consumer spending.

US consumer confidence sank in January to its lowest level since 2014, as households grew increasingly anxious about the economy. The Conference Board’s Consumer Confidence Index fell sharply from 94.2 in December to 84.5, with perceptions of labour market conditions, personal incomes, and business conditions deteriorating across both current assessments and future expectations. Yet, despite growing pessimism, consumer spending remains surprisingly robust, with real spending up 3.5% in Q3 2025, a sign that the recovery continues to follow a K-shaped trajectory. High-income households are fuelling growth, while the bottom 60% of earners face rising financial pressures, job insecurity, and limited wealth gains. Employment sentiment underscores this divide, with only 23.9% of respondents saying jobs are plentiful, while 20.8% see them as hard to get, producing a net reading of just 3.1%, the lowest outside pandemic levels since 2016, hinting at potential upward pressure on unemployment before it shows up in official data.

We expect consumer sentiment to remain subdued as financial pressures persist. Spending may hold due to high-income households, but widening inequality and job concerns could weigh on broader economic growth.