The stock market may trade cautiously as it moves into the corporate earnings season this week, with the softer macroeconomic background suggesting uneven reports (see the June 29 blog). Moreover, tariff developments could keep the market on edge, as could Administration pressure on Fed Chair Powell to resign. Nevertheless, there are reasons to be optimistic about the market. Tuesday's June CPI Report could lift expectations of a Fed rate cut at the July 29-30 FOMC meeting. A rate cut would likely still be a long shot, unless there is some pullback in announced tariffs. Europe's decision not to retaliate at this point is encouraging that a trade deal will be reached before the August 1 deadline -- a market positive. However, it remains to be seen whether this will be the case.
Consensus looks for +0.3% m/m for both June Total and Core CPI. This would be a bit on the high side and not lift expectations of a near-term Fed rate hike. A consensus or higher print would likely reflect some impact from tariffs. Also, Airfares should not be as weak as in April and May, since seasonal factors turn neutral after depressing them in those months. However, a lower print for Core can't be ruled out. Owners' Equivalent Rent needs to stay low at 0.3%. More generally, importers may have lowered prices to offset some of the tariff and maintain market share. And, the subdued wage inflation in the US, as seen in the June Employment Report, could help hold down price increases.
While a low CPI print could fan expectations of a near-term Fed rate cut, the latter is still probably a long shot. The June FOMC Minutes indicated only a couple of participants considering a July easing. Most of the FOMC members were focused on inflation risks stemming from tariffs. And, Trump's latest spate of large tariff announcements could make these members even more concerned.
The latest Unemployment Claims data have mixed implications about the labor market, but are not likely to concern Fed officials. Initial Claims remain below the June average for the third week in a row, suggesting a pullback in layoffs. In contrast, Continuing Claims are still high, suggesting that companies are reluctant to hire. Uncertainty about the impact of tariffs could be weighing on hiring decisions.
Despite the divergence between Initial and Continuing Claims, if both stay at their latest respective levels for the next few weeks, they would point to a speedup in July Payrolls -- outside of government jobs, which could drop as state & local education jobs unwind their June jump and some of the Trump cuts in federal government jobs show up. Although the July Employment Report will be released after the next FOMC Meeting, the current levels of both types of Claims are probably not high enough to change the Fed's view of a solid labor market.
Looking ahead, the imposition of tariffs could have two, opposite impacts on the labor market. Relocation of US production from abroad should boost demand for labor. However, the drag on demand for goods and services from higher prices should depress it. The latter could have the more immediate impact, since it takes time to shift production to the US. Another major factor whose impact on labor demand is likely to increase over time is the substitution of AI for workers. So far, there is anecdotal evidence that this is happening. The negative impacts on the labor market from these two channels could result in Fed easing at some point.
Away from the economy, a possibly significant hit to the stock market would likely result if Trump succeeds in removing Powell from the Fed Chair. The "manufactured" controversy over the Fed's new headquarters could be the catalyst. With a new Trump appointee expected to be quicker to cut rates, longer Treasury yields should rise and the dollar fall. The former, particularly, would hurt stocks.