Stock Market Outlook: Two Possible Positives, One Possible Negative

There are two potentially positive factors in the near-term stock market outlook:  /1/ a strong Q421 corporate earnings season (see last week's blog), and /2/ a peaking of the Omicron variant of the Covid-19 virus.  Health experts see the possibility for the impact of the variant to peak by late January and then fall sharply.  In the background, however, some key US macroeconomic data -- Mfg ISM, the December Employment Report and CPI -- as well as this week's release of the December FOMC Minutes risk underscoring the need for Fed rate hikes to slow the economy and  stem inflation.  This reminder could cause stocks to "hiccup," particularly if longer-term Treasury yields rise on the releases.

The December Employment Report risks showing a speedup in Nonfarm Payrolls and a further decline in the Unemployment Rate -- in line with the consensus estimates (+400k Payrolls and 4.1% Unemployment, versus +210k and 4.2%, respectively, in November).  The Unemployment Claims data improved last month.  Both Initial and Continuing Claims fell sharply, indicating a drop in layoffs and an increase in re-hiring.   The Insured Unemployment Rate fell 0.2% pt between the November and December Jobs Survey Weeks.  While there is not a one-for-one relationship between the change in the Insured and Civilian Unemployment Rates, they tend to show the same trends.  The consensus estimate of +0.4% m/m in Average Hourly Earnings should not present a problem for the markets as it equals the trend seen since June.  Even a slightly high 0.5% print could be dismissed by the market as just an offset to the below-trend 0.3% November increase (assuming no revision).

                Level in Survey Week (percent)
    Insured Unemployment Rate            Civilian Unemployment Rate
Jan21           3.4                                           6.3
Feb              3.1                                           6.2
Mar             2.7                                           6.0
Apr              2.6                                          6.1
May             2.6                                          5.8
June             2.5                                          5.9
July              2.4                                          5.4
Aug              2.1                                          5.2
Sep               2.1                                          4.8    
Oct               1.7                                          4.6
Nov             1.5                                           4.2
Dec              1.3                                          na

Consensus looks for a dip in the December Mfg ISM to 60.2 from 61.1 in November -- still a high level that signals strong manufacturing growth.  The evidence is somewhat mixed, so an increase can't be ruled out.  The Mfg ISM ranged from 59.9 to 61.1 since July. 

At this point, it looks as if the December CPI should show inflation remained high.   But, some of the main causes for the speedup may be behind us.  In particular, oil prices have stabilized.  Importantly, the Biden Administration reportedly has shifted to encouraging US domestic oil production rather than trying to repress it.  This shift could lead to increased supply next year.  Higher transportation costs have filtered through to many prices, so a stabilization of these costs could be important in holding down inflation ahead.