Brian Pietrangelo [00:00:00]
Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, January 16th, 2026. I'm Brian Pietrangelo, and welcome to the podcast. If you are a football fan, you're pretty happy this week with the routine games on TV for the NFL playoffs. And in addition, on Monday evening, we've got the College Football Series playoff championship game. Good luck to the Miami Hurricanes and especially to the Indiana Hoosiers. With that, I would like to introduce our panel of investing champions. Here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Rajeev Sharma, Head of Fixed Income, and Michael Bove, Senior Equity Research Analyst. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor. Taking a look at this week's market and economic activity, we've got four key economic reports for you to share with you this week. And then we've got a couple other topics to chat about with our panel. So looking forward to that with our group today. On the economic report front, first up is the Consumer Price Index measure of inflation, which came out for December 2025. The month-over-month numbers were fairly the same at 0.3 and 0.2% for all items and core. And that leads into the year-over-year numbers. which stayed the same. Specifically, October, November, and December were three months where October was not collected. So November of 2025, year-over-year inflation for all items was 2.7%, and that was the same for December that was released this week, 2.7%. Core items, excluding food and energy, in November, 2.6%, also in December, 2.6%. So ultimately, this means that inflation continues to be persistent, moderating very slowly, the good news being not going up, the bad news being not going down at a quicker pace. So we'll talk about that with our panel today. And second, for the month of November 2025, the Advanced Monthly Retail Sales Report was produced, and it came out at a 0.6% monthly increase over the prior month of October, which was a pretty healthy spend in terms of overall consumer spending. Now this follows an October number, which was essentially flat, so seeing some increase in November is a good sign right now, but we'll have to see how this shakes out for the remainder of the year as we get past the December report. And third, on Wednesday of this week, the Federal Reserve released its beige book, which comes two weeks in advance of its upcoming meeting on the 27th and 28th of January. And the overall economic activity summary showed that two-thirds of the twelve districts, so eight of the twelve districts, showed slight to modest pace of overall economic activity. The remaining 3 districts reported no change and one reported a modest decline. This is a slight improvement over the last few Beige Book reports, which basically had showed limited to no activity, so I guess that means the market is headed in a little bit of a right direction as we go forward here in the new year 2026. On the labor front within the Beige Book Report, eight of the twelve districts basically reported no changes in hiring. So as we have talked about on the podcast and elsewhere, the slow to fire and slow to hire dynamic seems to be playing out within the Beige Book Report. And 4th, when we look at the initial unemployment claims for the week ending January 10th, the number declined from the prior week down to 198,000. Again, we have shared with you that this has remained very favorable for the last 18 to 24 months, being fairly stable and not increasing, therefore showing, again, stability in the labor market when it comes to layoffs. In other related news for the week, we've got 3 updates for you. First, we begin the fourth quarter earnings season with a number of reports. We'll touch upon that likely next week. We also had an anticipation that the Supreme Court would provide its ruling on the IEPA tariffs. We did not get that release yet in terms of a decision from the overall Supreme Court yet. And even though it seems like old news, just last week on Sunday, there was an investigation into (Federal Reserve) Chair (Jerome)Powell regarding the new structure of the Federal Reserve building and the costs associated with it. And for the first time, I think ever, if not in a long time, Jay Powell actually responded with a public statement regarding Fed independence. So we'll talk about that with Rajeev and the panel today. With that, let's begin our podcast by going to George to get his take on CPI, other economic data, and his thoughts for the week. George?

George Mateyo [00:05:13]
So Brian, we're finally getting some economic data on a pretty consistent basis now, and I think we're almost caught up where we were with all the shutdowns from a few weeks ago, maybe months ago now. And the picture is still pretty decent. I mean, the Inflation data, as you suggested, is kind of calming down a little bit. It's not running out of control. I do think that there might be a little bit of some catch-up still with the data on the inflation side that we haven't quite seen yet. And of course, we just don't know. We still don't know, frankly, what the impact of tariffs might be. So, I think there's maybe a question mark, but some moderation still inflation that doesn't suggest it's getting worrisome anyway. Retail sales that we've kind of caught up to in that as well. We've seen some big pickup there. So the overall consumer, the strength of consumers seems to be in a pretty good place right now. And that's maybe kind of supported by holiday spending and other things too. But it is somewhat a K-shaped dynamic, as we talked about, where high-end consumers are doing quite well and spending, I wouldn't say freely, but they're comfortable, right? And the low end, unfortunately, is not. But nonetheless, the overall numbers suggest that the economy, from the consumer's perspective, is good. And then lastly, of course, you mentioned, of course, is the employment situation. And we look at things like unemployment claims, which is curious in the sense that if you look over the history of the data series, it's a good series we'd like to look at because it's very current, it's very timely. And also, we have a lot of history with it. And it goes back to, I think, the early 1960s in terms of its data series. And if you look at the most recent reading, it suggests that we're probably in the top two or one or 2% in terms of the overall level of claims being as low as they are, meaning that there's probably been 98% of readings that have been higher than where we are today. So that suggests that, again, the overall labor market is a good place. Now, I would caveat that in the sense that... Some of the other survey data that people point to suggest that maybe that number is somewhat artificially better than it appears. And by that I mean there are people that frankly just don't file for unemployment claims as much as it did in the past. So it's not the same thing that we could look at back in the 1960s, say, and draw some inference to today. The other thing people have to keep in mind is that when people are working, but they're probably in a job that they don't want to be in, but they're looking for more permanent work, that actually doesn't count as people applying for unemployment insurance. So again, that number might be somewhat artificially low. And again, the Fed has to kind of wrestle with that in the sense that they have some of these confusing signals that they're drawing from. I think it also suggests that maybe we just don't know the true strength of the labor market because of some other policy issues that we talked about on these podcasts and other places as well. So it does seem to be kind of an interesting setup for the Fed Irrespective of what's happening inside the Fed building or around the Fed building these days lately. But I've seen a few people now suggest that maybe the Fed won't cut it all this year. And one actually, one I think investment bank came out this week and said the Fed might actually hike rates sometime at the end of this year or early next year. What are your thoughts, Rajeev, about that? And at the same time, I guess we should also talk about credit spreads at some point too. But let's talk about the Fed first and kind of what you're thinking about with respect to the Fed and their policy for the rest of this year.

Rajeev Sharma [00:08:14]
That's very interesting that you say that, George. I've also heard some people calling for three or four rate cuts this year, some calling for none, as you said. And the rate hike is a new one. I haven't seen that yet. But that just shows you how much uncertainty there is in the market about what the Fed's next action are going to be. The latest CPI data gives the market a very clear signal that January, there is not going to be a rate cut. It's pretty much off the table. I think last time I checked, the market expectations were about 4% for a January rate cut. So you can discount that, that it's not going to happen in January. And the inflation numbers strengthen the expectation that there will not be a January rate cut. The numbers are pretty much consensus numbers, but that's not enough disinflation for the Fed to feel comfortable to cut rates where we are right now. Traders are not expecting it either. Inflation is still above the Fed's comfort zone. The Fed narrative continues to point towards their target of 2%. And then you add to that some of this political noise that we're seeing, that we were hearing since last Sunday, and that the markets are even more skeptical that, amidst all this noise, that they would make a move in January. So January's off, and then you also throw in the Fed's dual mandate, as you mentioned, which is labor, with unemployment dipping to 4.4%, there is no immediate pressure for the Fed to do a rate cut right now. So what does the market expect? Right now, if you look at rate cut expectations, the market continues to point towards two rate cuts for this year, with the June FOMC meeting likely being the first rate cut of the year. So what we saw in the bond markets this week was taking all of this into account, taking what happened as far as some questions around Fed independence. We did see that the bond markets this week saw treasury yields move lower. Front-end yields went lower on this increased confidence in those two rate cuts for the year. Long-end yields, they eased on the inflation report, and some safety haven asset buyers, they actually stepped in. So you did see some investors come in and buy treasuries where they are right now, especially in the 10-year and beyond part of the curve. But the political noise that you mentioned here around Fed independence, I think, is also important that we highlighted. It led to somewhat of a risk-off tone in the beginning of the week, but that did help the Treasury market. We did see investment-grade credit spreads tighten modestly this week. Credit spreads were about two basis points tighter in investment grade, and high-yield credit spreads were tighter by about four basis points on the week. So essentially, if you look at as we started the week and as we ended up the week, you could pretty much say the market shrugged off the news of the Fed subpoenas and Powell's statement last Sunday. But I do feel that Fed independence is still a key consideration in our market outlook, and a clearer picture should emerge as we get closer to Powell's term ending in May. Powell did use his statement to clearly articulate the confrontations between the executive branch and the central bank and the importance of Fed independence. (Janet) Yellen, (Ben) Bernanke, and (Alan) Greenspan, they all came out, issued a joint statement reiterating their support for Powell and the independence of the Fed. So I think right now the market's kind of trying to weigh their way through the political noise. We have so many other uncertainties in the market right now, but spreads are very well behaved in this market and safety haven buyers are stepping in.

George Mateyo [00:11:21]
Well, I'm glad you closed on that point about spread because I kind of teased that a little bit earlier before I tossed it over you, Rajeev, but let's stay on that theme for a second in the sense that credit spreads, of course, are a proxy for risk, as we like to think about in the sense that that's maybe the extra compensation an investor can earn by taking on additional risk than owning, say, a US treasury, which historically has been viewed as the safe haven asset. And now credit spreads, when I look at that, according to my screen anyway, we're at really pretty much all-time lows or all-time tights, as people would say, in the industry. And to some extent, as you said, that's a good sign for the economy. It's a good sign for overall, I guess, risk appetite, but it also has kind of some feeling that maybe people are too complacent or maybe too risk averse. And I've also seen some other survey data. When you look at people's actually overall portfolios, they're actually fairly complacently positioned, meaning that they don't think many bad things are going to happen. And I'm not saying we want to lean against that in a big way, but we have to be cognizant of which, when that switches, things could come unwound pretty quickly. So how are you thinking about that? And is that something that's on your radar? And I know you were talking to investors this week. Anything that you've heard from them when you're on the road?

Rajeev Sharma [00:12:31]
It's a very good point, George, because credit spreads are a good proxy for the health of the markets. We have seen credit spreads hit these all-time tights. And that's even after we had almost $2 trillion of new issuance last year. And we expect another banner year for new issuance. So supply is huge. But spreads remain very tight. And one of the factors behind that is demand technicals. There's a lot of demand for blue chip companies that are getting pretty decent coupons on. You're getting good income opportunities with some very, very solid companies out there. So investors feel comfortable investing in these blue chip companies and feeling that everything will be fine. The complacency factor, I think, is something that's going to be a very important issue for high yield credit spreads because they continue to be extremely tight as well. And all you need is one default to happen, and you can start seeing a ripple effect there. But default rates have been extremely low as well. So the confidence in the market, I think, is two-pronged. One, that these are very, very high-quality companies that are out there with very good coupons. The other aspect of it is the fact that there could be some complacency in the market. You would just need some default reaction in the high-yield part of the market to have a ripple effect, in my opinion. Well, thank you, Rajeev and George, for having that significant discussion on the credit markets.

Brian Pietrangelo [00:13:48]
I think it's very valuable for our audience. At this time, we'll close the podcast with our final segment with a special guest that we have. Michael Bove is joining us, Senior Equity Research Analyst within KeyWealth, to talk about what's happening in the energy markets and specifically artificial intelligence and electricity prices. So from that perspective, Michael, let's start out with talking about electricity demand. What does the past look like and what has changed?

Michael Bove [00:14:16]
Hey, thank you for having me first. In terms of electricity demand in the U.S., really the past hasn't been too interesting at all. From 2005 to 2020, the average annual demand growth in the U.S. was only 0.1%. So, it was practically flat over. call it a decade and a half. And the reason for this is while you had population and economic growth, this was offset by efficiency improvements. Think LED light bulbs, energy efficient appliances, paired with a more service-based economy, which is less energy intensive than manufacturing. Today, we obviously have artificial intelligence demand centers or data centers driving demand, paired with green shoots in manufacturing.

Brian Piertangelo [00:14:58]
So let's talk specifically about that. Are the artificial intelligence data centers responsible for the current price increases in your mind?

Michael Bove [00:15:05]
The short answer is to some degree, but not entirely. Really, it's complex. If we look at an analysis from 2019 to 2022 to 2025, in several large markets in the US in terms of power markets, prices have actually moved severely or pretty substantially higher on flat demand. And what we've seen is that grid operators are not currently prepared for sudden demand spikes, but actually the mix of power production and generation has been at a higher cost over time. So demand, while power prices are moving higher now, it's not entirely demand-driven at this point.

Brian Pietrangelo [00:15:45]
Great, and so putting all that together, what do you think our investors should know about the future state of electricity prices?

Michael Bove [00:15:52]
Unfortunately, there's no easy fix in the short term, right? There are talks about power caps, power price caps, but these would only bring power shortages and outages and would not incentivize power generation companies to bring power to the grid. Additionally, it is hard to bring power generation to the grid given multi-year backlogs. Like the leading U.S. power generation equipment manufacturer has backlogs out through 2030. So really, there's no short-term fix here. And I would say that investors and consumers should expect higher power prices in the near to medium term.

Brian Pietrangelo [00:16:27]
Great, thanks. Michael, any other thing you want our audience to know in terms of just general knowledge about what's going on in the industry?

Michael Bove [00:16:34]
I would, one final thought is it's very complex. You know, it's not so easy as attaching a generator to your house. There is a complicated mix of power and voltages and and that these levels have to be maintained at all times in a very interconnected grid. So it's a very complex problem and it's not, there's no easy fix, like I said earlier.

Brian Pietrangelo [00:16:56]
Great. Well, maybe we'll have you back on in a couple, six months from now to give us an update. There's a lot of rumors going around about Microsoft buying Three Mile Island and regeneration of nuclear energy as a source for data centers. So we'll want to get your take on that. Michael, thanks for joining with the podcast today.

Michael Bove [00:17:10]
Thanks, Brian.

Brian Pietrangelo [00:17:11]
Well, thank you for the conversation today. George, Rajeev, and Michael, we appreciate your insights. And as we head into the weekend, a quick reminder that Monday is the celebration of the national holiday honoring the works and the initiatives of Dr. Martin Luther King Jr. and everything that he was able to support and accomplish in his life. Well, thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up until next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Disclosures [00:18:00]
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