The stock market may continue to rally this week, as expected strong corporate earnings reports begin to be released However, there could be some caution going into Tuesday's release of the important December CPI. The consensus estimate is not soft enough to back a Fed rate cut at the January 27-28 FOMC Meeting. A below-consensus print for the Core CPI cannot be ruled out, nonetheless.
Consensus looks for +0.3% m/m for both Total and Core CPI for December. The y/y would be steady at 2.7% for Total and move up to 2.7% from 2.6% for Core. Both the m/m and y/y would not show any movement toward the Fed's 2% inflation target -- arguing against a January Fed rate cut.
There are mixed considerations regarding whether the Core CPI prints 0.2% or 0.3%. There is a decent chance that the Total CPI will print 0.2% even if the Core rises 0.3%.
Supporting the consensus 0.3% estimate, tariffs could continue to lift some prices. And, Airfares could rise thanks to seasonal factors. They add to Airfares in December after subtracting in October and November. Owners' Equivalent Rent could be a problem, as mentioned below.
Lower-than-consensus CPI prints are possible, however, but likely require Owners' Equivalent Rent (OER) to stay low at 0.1% m/m and Airfares and Lodging Away From Home to be little changed. /1/ OER appeared to have been estimated at 0.1% for both October and November by the Bureau of Labor Statistics (BLS). It fits with private surveys indicating a slowdown in rents. However, if the December survey shows the BLS estimates were too low, the entire correction could be put into the December OER, causing the latter to jump. /2/ Seasonal factors boost Lodging by less in December than in November, suggesting a slowdown in the Lodging component of the CPI.
The other important US economic data this week will be December Retail Sales. Consensus looks for good-sized increases of 0.4% m/m for both Total and Ex Auto. The latter would match the November gain. A consensus-like print would show that the weak labor market is not severely hurting consumer spending. A boost to consumers' wealth from stock market gains could be the offsetting factor fueling consumption. Solid consumption growth is embodied in the Atlanta Fed Model's latest (but early) estimate of a very strong 5.1% increase in Q425 Real GDP Growth. As it stands, the latter points to another quarter of strong Productivity Growth -- a positive for corporate earnings and the Fed's inflation fight.
The December Employment Report confirmed a soft labor market but apparently not soft enough to dampen wage inflation. Besides a small 50k m/m increase in Payrolls, the Nonfarm Workweek fell back to 34.2 Hours from 34.3 Hours in November. Both figures show that companies are holding back on using workers, possibly substituting AI for them. Although the Unemployment Rate slipped to 4.4%, it remains high.
Despite the soft labor market, Average Hourly Earnings (AHE) stayed at 0.3% m/m, the average pace in 2025. The y/y rose to 3.8% from 3.6%. There was better news on labor cost inflation in the Q325 Productivity Report. Compensation/Hour -- the broadest measure of labor costs -- rose a below-trend pace for the second quarter in a row. The y/y at 3.2% is roughly in line with AHE. Both are consistent with the Fed's 2% inflation target once productivity is taken into account. This is seen in the 1.2% y/y for Q325 Unit Labor Costs. Labor costs are not the culprit behind cost pressures on prices. The culprit is tariffs, seen in the surge in Non-Labor Unit Costs in Q225 and Q325 (7.8% and 11.6%, q/q saar, respectively).
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