RIsk To Stock Market Rally in Early January?

The stock market should continue to climb into year end, before some consolidation in early January is reasonable to expect.  The latest economic data should support the market rally immediately ahead.  They point to slower growth and inflation.  They even suggest the Fed's 2% inflation target is being met.   But, with the market having run up so much and possibly overshot fundamentals, it is vulnerable to a pullback at some point.  In early January, the risk is that a stronger December Employment Report triggers some profit taking.

Last weeks' November Personal Income Report pointed to both slower consumption growth and inflation.  Real Consumption in November was 2.5% (annualized) above the Q323 average, compared with the 3.1% q/q pace in Q323.  The pace is below the prior estimate in the Atlanta Fed model's forecast of Q423 Real GDP Growth.  The latter was revised down to 2.3% from 2.7% as a result.  Meanwhile, the PCE Deflator, both Total and Core, is running close to the Fed's 2% target on a 6-month basis.  The 6-month annualized change is 2.0% for Total and 1.9% for Core.

The lower Atlanta Fed model's projection, however, still suggests economic growth may be faster than desired by the Fed, as it is above the Fed's Central Tendency 1.2-1.7% Real GDP Growth forecast for 2024.  A continuation of solid growth next year could dissuade the Fed from cutting rates.  The next important piece of evidence with this in mind will be the December Employment Report (due January 5).

Early evidence suggests the Report could be problematic.  The Claims data so far suggest the December Nonfarm Payrolls may speed up (excluding strikers).  Initial Claims averaged 211k over the 4 weeks ended in the December Payroll Survey Week, versus 221k ending in the November Survey Week.  They indicate that layoffs have fallen.  So far, Continuing Claims are down slightly since the November Survey Week.  However, Continuing Claims don't rule out the possibility of  rebound in the Unemployment Rate after November's surprising decline to 3.7%.  The Rate may have to rebound to at least the most recent high of 3.9% to prevent being dismissed as "noise."

This week's calendar of US economic data is light.  House Prices and Chicago PM should be of only modest interest to the markets.  The Unemployment Claims data will be the most important.