Markets, the Fed’s “Data Dependence,” and What to Watch Next

In this episode of the Cents of Security Podcast, host Mary MacNamara sits down with Interactive Brokers Senior Economist Jose Torres to break down what’s moving markets right now—and which economic releases matter most for newer investors.

Mary MacNamara  

Hello everybody and welcome to the Cents of Security Podcast. Today we’re here to get insights on economic news from IB’s Senior Economist, Jose Torres. Welcome, Jose. How are you?

Jose Torres  

Hi, Mary. Doing great. How are you? Great to be here.

Mary MacNamara  

Good, good. Same here. So, lots to cover today. What’s going on?

Jose Torres  

Well, we this morning, it’s February 19th, we got initial unemployment claims. Lower than expected. We got pending home sales weaker than expected. Markets are a little soft today been really soft all year, but today’s weaknesses derived from Middle Eastern tensions. There’s a possibility, possibility of a military conflict between Washington and Tehran that’s raising oil prices and lifting interest rates modestly.

And then you had Walmart. Issue cautious guidance going forward for the rest of the year due to labor availability concerns, uncertainty about tariffs, as well as worries about input costs. So those two combined are leading to a little bit of a weakness in markets today. Overall, the main driver has been that folks are growing a little skeptic about the substantial artificial intelligence. Capital expenditures the ability for those measures to deliver buoyant returns in the future. There’s a little bit of skepticism about those returns maybe being mediocre, regular, not out of this world. And that skepticism has really buried the bids for the tech stocks, the cyclically oriented rate sensitive names, and the Russell 2000 and the Dow, those have done great, but tech carries so much of the baskets the Magnificent Seven specifically, so those areas haven’t been able to offset the weakness in overall tech.

Mary MacNamara  

So, couple of questions here that, often come up, you know, obviously this channel is focused on new investors. So, when, when people say the Fed is data dependent, what data are they actually watching and what can we learn from the FOMC minutes versus the Fed’s actual rate decision?

Jose Torres  

To think about the data dependency of the Fed, an important thing to consider is what is the mandate of a central bank, and the mandate is stable prices and maximum employment. So, right there you can kind of see, okay, so they’re looking at prices and they’re looking at employment. Employment, the number one indicator is going to be non-farm payrolls.

Number two indicator is going to be the unemployment rate. That’s going to tell you what’s the level, the pace of hiring, as well as what’s the percentage of joblessness out there, how hard or how easy it is to find work. And then on the other hand, you have prices, you have several indices for that.

But the personal consumption expenditures index, that’s the preferred gauge of the Fed has. A more limited housing impact in it than the CPI, and the last 15 years or so, the Fed decided to start using the PCE rather than the CPI. In my opinion to favor looser monetary policy or rates that are lower rather than higher because the CPI was running hotter than the PCE, but now that housing costs are decelerating and rents are going negative in a lot of places, now we have the opposite case, Mary, of CPI is lower than the PCE.

Mary MacNamara  

And that’s what comes out tomorrow is the PCE. Right? So, what are people saying about that for tomorrow?

Jose Torres  

In general folks, so the PCE is not really that heavy of a statistic, believe it or not, Mary because it’s well telegraphed. Once you have the consumer price index and the producer price index numbers that are typically released in earlier periods of the month, you kind of know what the PCE is going to be because what goes into the PCE are the direct inputs that are already made available from the CPI and the PPI.

So there’s not really going to be much of a surprise there, in my opinion, however, you could have the GDP print, you know, that’s going to be huge, because that can come, that’s like non-farm payrolls. It’s not really that well telegraphed. It could come really all over the map. So, folks will be looking at that.

We also have, just looking here at other data. Series that we have tomorrow. We have the Flash PMI, the purchasing managers, index indices, and those come, those are for February. So that’s pretty good. I like those data points. because you get February data, 20 days into the month roughly. So that’s, you’re going to get manufacturing and services numbers.

The expectation on manufacturing is 52.6 on services 53, anything above 50 is an expansion. Below is a contraction. And essentially what S&P Global does is that it talks to business leaders in both of those industries and essentially tries to gauge what’s going on with customers. Are they ordering?

What’s your production? Are you making a lot of goods and services? What’s going on with employment? Are you hiring, laying off? How about prices, inputs, outputs, inventories, et cetera, to really gauge, you know, what the strength of the industry is, of course, in the US it’s much more services oriented, but manufacturing has been this year so far, very, very strong.

The ISM numbers for manufacturing that we got earlier in the month or February 1st around there. Terrific numbers of four year high or something like that. Something crazy like that. Really expecting the goods producing industries to start to ramp up and benefit from the Big Beautiful Bills provisions that were passed last year.

So, we’ll see what happens there. On GDP, the expectation is a 3% increase, quarter over quarter following last quarter is 4.4%. Remember, we had the longest government shutdown in history during that period, so that’s expected to weigh on activity a little bit. You know, you those furloughed federal workers they had some pressure spending during the month.

PCE price index expected to come in at 2.8% year over year. Core PCE Index expected to come in at 2.9%, so reflecting slower progress on inflation. The CPI also got new home sales, expected to be 730,000 seasonally adjusted annualized units. So pretty heavy day of data that we have tomorrow, Friday, February 20th.

Mary MacNamara  

That’s great. Okay, one last question here, just a little something different. The University of Michigan has a sentiment survey, which isn’t about hard data like GDP, so why do investors still pay attention to it?

Jose Torres  

Yeah, because they try to get a gauge on how folks are feeling. Not just folks, but also businesses. In fact, the PMI data that we’re going to get tomorrow, same thing. It’s soft data. It’s not hard data; it’s just word of mouth. It offers a, a differentiation of diversification of the data in the past. The use was more intended to lead what economic performance would be later on.

But that relationship has really reversed. You don’t really see that relationship anymore where sentiment and confidence figures start to tick down, oh, we’re in a recession now. That’s how it used to be, but not anymore. In fact, how households and individuals are feeling are increasingly disconnected from what’s actually happening in the economy or in markets for that matter.

So, you know, that’s been, the uses of the gauge have shifted. Now it’s more part of the buffet of data. There’s been questions over the quality of numbers all over the place from different sources, from the government, from private sector sources. So, as economists, as investors, as analysts and researchers, what we do at this point is we look at the data, we have our favorites, but it’s sort of like a buffet table. We go up and we select the dishes that we like, we analyze them and we get what we can from every dish, and that’s what the soft data is. That’s what the hard data is. We just kind of look at everything together to see what the arrogant message is overall.

I think that’s what the main use at this point is for those sentiment surveys.

Mary MacNamara  

What about like, obviously this past winter in the USA has been pretty harsh, right? And so where are those numbers? Like obviously with electricity and oil prices potentially have gone up a little bit. So where do you find that type of information?

Jose Torres  

Like how much the prices of energy have increased and that kind of

Mary MacNamara  

And how it’s affecting the consumer or household?

Jose Torres  

So how it’s affecting the consumer. We’ll see that in the set consumer confidence, consumer sentiment surveys in a word-of-mouth fashion. We’ll see PC inflation comes out in a report called personal spending and income. So there, we’ll see are higher oil prices dampening spending for gasoline?

Are people driving less? Because crude oil prices are higher you know what’s going on with that. As far as the prices themselves, you can see them live in the futures markets. If you want to see crude oil or natural gas, crude oil is more jet fuel, gasoline. Even gasoline futures, they have that too directly, and the natural gas, it’s going to be a good gauge of electricity and heating costs.

And then in the Department of Energy’s weekly report, you actually have average retail prices for gasoline, for natural gas, for all those different kinds of energy categories. So can see, you know, can really have a, again, a buffet of data. We’re in this information overload era where we just have tons of stuff everywhere.

Mary MacNamara  

You know, one of the, one of our popular podcasts last year and the prior year was credit reports. Right? So how is the consumer doing with credit? Are they overextending themselves or are they saving more? What, what are the trends there?

Jose Torres  

Saving has been really terrible, but that’s been used as a way to signal that the economy is going to keep growing because, oh, they’re not saving. Oh, they’re never going to save. Oh, this is great. That means they’ll keep spending. So, there’s concerns, there’s been worries that delinquency levels are too high, that loans are buy now, pay later loans.

Folks are overextending, not worried about their student loans. There’s angst about that, but it’s just that it’s been going on since 2022 and its 2026 and the consumer just keeps on going. The discretionary services categories like airfares, concerts, entertainment venues are doing great restaurants, bars so it’s really, I mean, you know, at this point they have jobs.

Incomes are growing, wage pressures are up. So, asset prices overall are doing well, so you kind of just got to remain bullish on the consumer just because those things are pretty strong. Even if we have a down year in stocks this year, it, it’s three spectacular years from 2023 to 2025, should be able to continue to bolster the wealthier consumers and the middle and lower income.

Consumers should continue to catch tailwinds from the strong labor market that’s offering them rising paychecks.

Mary MacNamara  

Good. Well, let’s end it there because that’s kind of positive news right there. So, Jose, thank you so much once again, Jose Torres, our Senior Economist at Interactive Brokers. Thank you so much.

Jose Torres  

My pleasure, Mary. Thank you.