The US dollar weakened yesterday after retail sales data showed no growth in December on a monthly basis. The annual figure retreated to 2.43%, from around 3.6% printed a month earlier. That pulled the Atlanta Fed’s GDPNow forecast for Q4 down to 3.7%. The figure was hovering above 5% in early January.
There’s more: delinquency rates rose to the highest levels since the pandemic for some groups — in line with waning consumer confidence, weakening jobs data and growing complaints about the cost-of-living crisis — something the White House would rather not talk about.
But it may be happening. US consumer spending may be weakening for real this time. That is a major threat for an economy where consumer spending is the main pillar of growth. Massive AI investment will certainly continue to do the heavy lifting, but it won’t necessarily create jobs on a net basis, nor will it ease the cost of living overnight.
If that’s the case, the two-speed growth in the US will require the Federal Reserve’s (Fed) support to feel better. This is why we see the US 2-year yield — which best captures Fed expectations — falling to 3.5-year lows and the US dollar weakening. Softer yields and a cheaper dollar are positive for equities, but with a nuance. A softer Fed reinforces the rotation trade and fuels appetite for smaller and non-tech companies, rather than Big Tech — which ultimately benefits from a weaker dollar but is now being questioned by investors over ambitious AI investment plans, increasingly financed by debt.
And that’s a big deal. One of Big Tech’s bright spots — what made these companies relatively immune to rate cycles and global crises — was their strong balance sheets and ample free cash flow. But the past three years of heavy investment have eaten into that cash, forcing them to turn to debt markets. Google just issued a $20bn debt this week on top of $17.5bn issued last November, and it is not alone. Meta issued $30bn in debt in October, Oracle a whopping $43bn since last September, and Amazon $15bn. The problem is that rising debt changes their leverage profile and risk dynamics — and that should weigh on valuations.
Obviously, a softer rate environment would help. But for now, investors are focused on valuations. The S&P500 was offered near a record high yesterday, while its equal-weighted version hit a fresh record high. The Dow and the mid-cap index also extended gains to fresh records. Small caps looked more timid — likely reflecting the rapid deterioration in Main Street data.
Today, the US will release its latest jobs data — originally due last Friday but postponed to today due to a partial government shutdown. Expectations are weak. The US economy is expected to have added around 66K nonfarm jobs in January, with wage growth slowing to 3.6% year-on-year. The unemployment rate is seen steady near 4.4%.
If we dig deeper, however, unemployment among workers aged 16–24 stood above 10% in December. The struggle is real.
A soft data set would likely reinforce dovish Fed expectations, push short-term US yields and the dollar further lower, and support the rotation trade. Stronger-than-expected data may reduce expectations for earlier Fed cuts, but it won’t change the broader narrative that part of the US economy — excluding tech — is heading in the wrong direction. Main Street needs the Fed’s help. And softer spending could temper inflation, allowing the Fed to support the economy.
Fed funds futures are now tilting toward a possible rate cut by April instead of June. The probability of a June cut is approaching 80%, up from roughly 50-50 earlier this year. The probability of an April cut stands at 42%, moving closer to a coin toss.
The Japanese yen is one of the biggest beneficiaries of the softer dollar. The USDJPY slipped below 153 this morning in Japan, in a surprising move after Takaichi won the weekend’s snap election. The next key support is 152.18 — the 38.2% Fibonacci retracement of the April 2025-to-January 2026 rebound. A break below that level would signal the end of the yen’s nearly year-long debasement.
Elsewhere, the tech oscillated between promise and pressure. TSMC continues to extend gains into uncharted territory after announcing a 37% jump in revenue this January — partly flattered by the fact that last year’s Chinese New Year fell in January — though the figure remains consistent with its 30% growth target for this year. Asian tech stocks extend gains to ATHs, also fueled by rising Fed and PBoC support.
Software stocks are less enthusiastic – desperate, hit by a fresh wave of weakness after news that an AI startup called Altruist released a new tool to help financial advisers personalize investment and wealth management strategies for their clients. Charles Schwab, which had been gently grinding higher, suddenly tripped and fell more than 7%. The news interrupted a rebound in software stocks that were battered by similar developments from Anthropic last week.
The divergence between AI enablers and software stocks is striking, to the point where the software dip may start to look attractive for those who believe AI tools won’t replace all lawyers and all client advisers overnight.
But what do I know…
