This Week's Key US Economic Data -- Much Uncertainty But Will They Help Stocks?

The stock market may trade cautiously into key US economic data this week, as they are subject to greater-than-normal uncertainty.   Nevertheless, consensus prints would likely be market positives.  

There is more than normal uncertainty regarding January Nonfarm Payrolls since they will reflect benchmark revisions, new seasonal factors and a revised "birth-death" model that estimates the net change in jobs from new companies less those going out of business.  Consensus looks for +70k m/m Payrolls, a speedup from +50k in December and +49k 2025 average.  Consensus expects Private Payrolls to rise by 70k, as well.  They rose 37k in December.  

There are two ways to use the ADP Estimate and Continuing Claims to predict speedups/slowdowns in Private Payrolls.  One way is to see whether the m/m change in them speed up or slow down -- just compare the m/m change in one month with that of the prior month.  The other way is to use the change in the m/m change -- the second difference.  For this, compare the change in the m/m change with that of the prior month.  Most of the time, these two ways have given the same prediction.  But, this was not the case in December.  The m/m change in Continuing was +30k in December, a speedup from +14k in November (see first table below).  The difference in these monthly changes was +16k in December and +55k in November (14 - -41k), pointing to a slowdown.  Private Payrolls in fact slowed in December, consistent with the second difference. 

Both the m/m change and the second difference in the ADP Estimate point to a slowdown in January Private Payrolls.   In contrast, both the m/m change and the second difference in Continuing Claims point to a speedup.  Continuing has done a better job than ADP in predicting speedups/slowdowns in Private Payrolls, and they support the consensus expectation of a speedup.  A near-consensus Payroll print may calm market fears of slow growth in early 2026.  Consensus estimates of solid gains of around +0.5% m/m for January Retail Sales, both Total and Ex Auto, also should mollify such fears.  

Consensus also expects a steady 4.4% January Unemployment Rate and a near-trend +0.3% m/m increase in Average Hourly Earnings.  These should not be problematic for the markets.  Subdued wage inflation is also expected for the Q425 Employment Cost Index.  Consensus looks for +0.8% q/q, matching the low print of the prior quarter (see second table below).  However, Average Hourly Earnings suggests upside risk, although not by enough to be of concern for the inflation outlook.  

There is a lot of uncertainty surrounding the January CPI, too.  It could be impacted by start-of-year price hikes and pass-through of tariffs on the upside and possibly an unwinding of one-off catch-up price jumps in the December CPI emanating from survey problems caused by the government shutdown.  Consensus looks for +0.3% m/m for both Total and Core.  Although these increases are above the pace consistent with the Fed's 2% target, the y/y would fall for both, moving them closer to the target.  Y/Y for Total would fall to 2.5% from 2.7% in December.  Y/Y for Core would fall to 2.5% from 2.6%.

                                       Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March               155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                50                               14

    Dec                   41                            37                                 na                               30     

    Jan 26               22                            na                                 na                               86                                    

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s                 

                             (q/q percent change)

                            AHE                ECI 

Q425                    1.0                    

Q325                    0.9                    0.8

Q225                    0.8                    0.9

Q125                    1.0                    0.9                             

 

Two Market-Important Developments

The stock market may be beginning to adjust to two developments:  /1/ a lower probability of Fed easing ahead and /2/ a reaction of other countries' trade policy to Trump's tariff regime.  The latter is probably the more significant market negative.  It could hurt stocks through a weaker dollar and higher longer-term yields.  Strong US economic growth and corporate earnings, however, may temper any downward adjustment by stocks.

This week's key US economic data are expected to be on the stronger side, reinforcing the Fed's decision last week to keep the funds rate steady and downplaying the possible need for easier monetary policy ahead.  Both the Mfg ISM and Nonfarm Payrolls are expected to improve in January -- despite the cold/snowy weather in parts of the country.  However, the implication of steady monetary policy should not be a problem for the stock market as long as economic growth is strong.  The latter ensures continued solid corporate earnings.  Moreover, as "insurance," the Fed would be ready to resume easing if the economy weakens.

Consensus looks for the Mfg ISM to rise to 48.3 in January from 47.9 in December.  This would be its highest level since September (49.1).  Some of an increase could be catch-up, since gains in both Durable Goods Orders and Manufacturing Output (part of Industrial Production) suggest the December Mfg ISM was too low -- although the weakest component that month was Inventories, not New Orders or Production.  

Consensus looks for Nonfarm Payrolls to speed up to +70k m/m from +50k in December.  Unemployment Claims data support the idea of a speedup, particularly Continuing Claims which fell a good deal since the December Payroll Survey Week.  Consensus also looks for a trend-like 0.3% m/m increase in Average Hourly Earnings.  Its y/y would fall to 3.6% from 3.8%.  However, there is more than typical uncertainty surrounding these estimates this month because the data (based on the Establishment Survey) will embody benchmark revisions, new seasonal factors and a new "birth-death" model to account for jobs created and lost when companies start and end.  It will be interesting to see if the Fed's estimate of a 60k overstatement of m/m changes in Payrolls will show up after these technical changes have been made.

The Unemployment Rate will not be affected by these technical changes because it is measured from data collected in the Household Survey, whose annual revisions were incorporated in the data last month.  Consensus looks for a steady 4.4% Unemployment Rate.  Rounding analysis suggests a steady Rate is more likely than a decline.  Since the Rate's un-rounded level was 4.44% in December, it will take a full 0.1% pt decline to get to 4.3%.  Nevertheless, a decline in the Rate should not be ruled out, given the drop in Continuing Claims.     

The moves by Canada and Europe to negotiate lower tariffs with China and India may be a greater problem for the stock market.  Their moves are logical reactions to the tariffs imposed by the US.  Since the latter will likely reduce their exports' share of the US market, it makes sense for them to find other markets to sell into.  

The channel to the stock market runs through the FX and longer-term Treasury market.  The countries' shift away from the US could reduce the role of the dollar in international  trade, lowering its value in the FX market.  A weaker dollar can have inflationary consequences and thus boost inflation expectations.  The latter, in turn, could lift longer-term Treasury yields.   So could the fewer foreign-earned dollars available to buy Treasuries.  The higher yields are a negative for stocks.  To be sure, a weaker dollar also makes profits earned abroad more valuable in dollar terms.  However, the broader negative impact from higher longer-term yields would probably dominate.

 

 

 

 

 

 

A Somewhat Disappointing Fed?

Strong corporate earnings reports may help the stock market get through a somewhat disappointing FOMC Meeting this week.  The Fed is not expected to cut rates and the Statement will not likely change from December's -- continuing to say that "inflation remains somewhat elevated" and "the downside risks to employment rose in recent months."  However, Powell may present a more balanced view of the risks in his news conference than he has in the past few meetings. 

Powell may feel less compelled to lean toward a Trump-desired policy easing because of the threat to Fed independence stemming from the DoJ's investigation into his Congressional testimony.  Even without this political interference, the US economy appears to be doing well and not needing further monetary policy stimulus.  Evidence to this effect is seen on both the real and inflation side of the economy.  Nonetheless, a Fed ready to ease if needed should be seen as providing positive support for stocks in the background.

The Atlanta Fed Model now predicts 5.4% for Q4 Real GDP Growth, which would be the third strong quarter in a row.  Good-sized gains in October and November Consumption support the model's prediction for Q425 Real Consumption.   Some of the model's predictions of other components of GDP are questionable, however.  So, the model's prediction should be viewed with caution at this point. 

Importantly from the Fed's perspective, the economy's strength may be finally helping the labor market, seen by the ratcheting down in Initial and Continuing Claims in January.  Although a little early, the Claims data suggest a speedup in January Payrolls from December's +50k m/m pace.  Nevertheless, it would be premature for the Fed to change the Statement regarding the labor market at this point -- although Powell may mention the improvement in Claims (thereby damping the downside employment risk in the Statement).

The economy's strength may be a factor in the steady inflation rate seen over most of last year.  The Total PCE Deflator rose by 0.2% m/m in 5 of 8 months since April 2025.  The Core PCE Deflator rose 0.2% in 7 of the past 8 months.  Both rose 0.2% in December.  Their 2.7-2.8% y/y, the longer-term measure Powell likes to refer to, remains above the Fed's 2.0% target.  The shorter-term 3-month annualized increase also is somewhat above target, with Total at 2.5% and Core at 2.3%.

The next couple of CPI reports will be important to see the size of start-of-year price hikes.  Companies could use them as an opportunity to more fully pass through the tariffs.  However, there could have been measurement problems behind some of the large price hikes seen in the December CPI, stemming from the government-shutdown-resulting delays in sampling.  The affected components could settle down in January or February, which month depending on whether bi-monthly sampling is used.  If it is used, then the price jumps in the December CPI could show up in the January CPI to some extent.

All this evidence argues for the Fed to take as wait and see approach to monetary policy.  Whether the tariffs' boost to prices turns out to be one-off should be evident by the Spring.  And, whether AI results in widespread job losses could show up by then, as well.  The window for a Fed easing may open up in a few months depending on how these developments turn out. 

 

 

Supreme Court Hurdles

The stock market may have to contend with important Supreme Court rulings on the Fed and tariffs this week.   On Tuesday, the Court may release its decision on whether Trump can fire Fed Governor Lisa Cook and whether Trump's tariffs are legal.  Possible market reactions are discussed below.  Favorable corporate earnings reports should cushion any market-unfavorable ruling.  

The stock market's reaction to a Court decision could depend on how the latter impacts longer-term Treasury yields.   A decision permitting Trump to fire Cook could be viewed as a step towards undermining Fed independence.  This would exacerbate future inflation risks, resulting in a steeper yield curve --which would be a negative for stocks.  To be sure, a replacement for Cook, along with a new Fed Chairman in May, would lift the probability of Fed rate cuts this Spring.   However, this possibility is likely too far ahead to provide a noticeable boost to stocks now.

In contrast, a Court ruling against Trump's authority to fire Cook could bolster the idea of Fed independence.  The yield curve should flatten, which would be a positive for stocks.  A decision that does not address Trump's authority to fire a Fed Governor but allows Cook to keep her job may have a minor impact on the stock market.  The question of Fed independence would just remain in the background and be ignored for now.  Such decision, however, could dampen the probability of a rate cut this Spring, making it more dependent on upcoming US economic data.

A Court decision permitting Trump's tariffs could be a positive for the stock market.  It would retain the government's collection of tariffs that have helped reduce the Federal Deficit, which is a positive for longer-term Treasuries and thus stocks.  The inflation boost from tariffs may be mostly behind us, so it could be a less important implication for the markets.  However, since it would leave open the door for Trump to impose more tariffs by whim, it would maintain a degree of uncertainty in the economic outlook that could hurt growth.  This impact would remain to be seen, so should not have an immediate effect on stocks.

A decision against Trump's tariffs could lift longer-term Treasury yields, a negative for stocks, because it would lift estimates of the Federal Budget Deficit.  However, since Trump has said there are other ways to maintain tariffs besides his declaration of a state of emergency, the markets' reaction may be muted.

Meanwhile, the macroeconomic background appears to be shifting against the need for a Fed rate cut.  Although the headline December CPI was benign, with Total +0.3% m/m and Core +0.2%, the composition did not show widespread softness.  There were a number of large increases, possibly related to tariffs or to lingering issues from the government shutdown's interference with the CPI survey.  The Fed will likely wait to see a sustained broader pattern of modest inflation before saying inflation is "licked."

The real-side of the economy appears to be doing well.  The Atlanta Fed Model's latest estimate of Q425 Real GDP Growth is 5.3% (q/q, saar) -- implying another quarter of strong productivity growth.  Manufacturing Output in the Industrial Production Report has picked up over the past two months from a flattish span in the prior three months.  And, the labor market may have begun to improve, seen in the downward trend of Unemployment Claims over the past three or four weeks.  

 

Strong Corporate Earnings Season Begins, CPI on Docket

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).

 

 

 

 

 

This Week's Key US Economic Data

The stock market may be boosted initially by the successful US action in Venezuela, but then turn cautious as this week's key US economic data may not be weak enough to push the Fed to ease at the end of the month.  A more likely window for a Fed rate cut is in the Spring (see my December 14 blog).  Nevertheless, expectations of strong Q425 corporate earnings should restrain any pullback.

The December Employment Report is expected to show Payrolls and Unemployment in the same range that had prompted the Fed to cut rates last year.   However, with a number of Fed officials saying the Fed already has eased a lot and further progress against inflation is needed to justify additional rate cuts, a more significant weakening in the labor market may be needed to sway them to a dovish position.

Consensus looks for a modest +55k m/m increase in December Nonfarm Payrolls (+50k Private Payrolls), which is a smaller increase than the +64k in November (+69k Private) and the +78k m/m prior 12-month average.  However,  the risk is for a larger increase than November's,  based on Continuing Claims (see table below).  The bi-weekly ADP Private Payroll Estimate also points to a speedup in Private Payrolls, and consensus looks for the monthly ADP Estimate to show a 50k increase after -32k in November.  While both Continuing and ADP give the same signal for December, Continuing remained a more consistent predictor of speedups/slowdowns in Private Payrolls in November.  Keep in mind that the Fed thinks the monthly change in Payrolls is overstated by 60k, so they would consider a near-consensus print to indicate a decline in Payrolls.

The improvement in Continuing Claims in December also suggests that consensus is right in looking for a dip in the Unemployment Rate to 4.5% from 4.6% in November.  Rounding analysis also keeps open the possibility of a dip.  The unrounded Unemployment Rate was 4.56% in November, so it doesn't take much to round down to 4.5% in December.  

Consensus also expects Average Hourly Earnings to return to a trend 0.3% m/m in December.  The y/y would edge up to 3.6% from 3.5% with this m/m change.  This could be the most important part of the Report, particularly if AHE slows to 0.2% or less.

This week's delayed release of the Q325 Productivity Report will provide a broader measure of labor costs.  Consensus looks for Nonfarm Productivity to rise 3.0% (q/q, saar), versus 3.3% in Q225.  Both are well above the 2.1% trend in 2024, albeit that the Q225 pace was just a rebound from a decline in Q125.  The Fed will like a strong Productivity print (and the risk is for a larger increase than the consensus estimate) as a way to prevent labor costs from being inflationary.  This is seen in Unit Labor Costs, which are expected to climb only 1.0%.  A 4.0% rise in Compensation/Hour -- the broadest measure of labor costs -- falls out of the calculations.  This is in line with the 4.0% y/y pace in Q225 and 4.4% y/y pace in Q424.  So, it would indicate steady nominal wage inflation.   Note that the Fed will likely wait to see if the large productivity gains continue before raising its estimate of longer-run non-inflationary growth significantly.

This week's other data are expected to be little changed from the prior month or trend.  The December Mfg ISM is seen up slightly to 48.3 from 48.2 in November.  The JOLTS Data are expected to show Job Openings edging up to 7.73 Mn in November from 7.67 Mn in October.

                                       Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March               155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                52                             -41 

   Nov                   -32                            69                                na                               14

    Dec                   41                            na                                 na                               30     

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s                                                                  

 

Strong Corporate Earnings and Productivity Growth

The stock market should be supported this week by expectations of another strong quarter of corporate earnings to be reported in January.  Although the next FOMC Meeting is not until the end of January, market "talk" also may center on the implications of strong productivity growth for monetary policy after last week's release of Q325 Real GDP.  If strong productivity is sustained, it would point to strong growth with low inflation.   It means that the Fed could still cut rates while GDP Growth is strong.

Productivity has been growing well above the trend seen in earlier years.   The typical estimate of trend productivity in the 1990s and early 2000s was 1.0-1.5%.  In 2024, the official measure of productivity rose 2.1% (Q4/Q4).  In H125, productivity averaged 0.8%, but this weakening may be temporary.  Using the difference between Real GDP Growth and Total Hours Worked (THW) as a proxy for productivity suggests strong productivity growth in H225.   The proxy suggests the Q4/Q4 growth will be close to 2.0% -- similar to that of 2024 (see first table below).   Note that this proxy has underestimated official productivity figures more often than not in recent quarters. 

Higher trend in productivity growth means that faster GDP Growth need not put pressure on the labor market.  The non-inflationary trend in GDP Growth would have moved up.  With trend labor force growing about 1.0% per year (based on population growth), trend GDP Growth (sum of labor force and productivity growth rates) is likely around 3.0% rather than the 1.8-2.0% Fed estimate of longer-term growth.  This pace should be consistent with both steady unemployment and inflation, if labor force participation rate is steady.  The participation rate, however, has risen since July.  If this is the start of an uptrend, labor force growth should continue to grow faster than the trend based on population growth alone and lift the Unemployment Rate further.  It would allow economic growth to exceed 3.0% without stirring up inflation.

This combination would argue for the Fed to refrain from tightening while GDP Growth looks to be excessive from an historical perspective.  Indeed, if AI is behind the ratcheting up of productivity growth and is resulting in fewer people being hired, the Fed should aim for even faster GDP than the higher trend growth rate.  

To be sure, it is difficult to predict the trend in productivity or labor force participation ahead.  The Fed has to judge whether sustained 3-4% Real GDP Growth will lead to higher inflation.  How the Fed responds could depend on whether the economy is operating at full employment.  At full employment, the risk is that the faster growth would result in higher inflation .  Higher interest rates would be required to match the productivity-driven higher rate of returns on business investments.  Otherwise,  investments would accelerate and consumption be boosted by a stronger stock market, both possibly leading the economy into inflationary territory.  At less than full employment, the Fed could allow more time to assess the possibility of sustained higher productivity (and labor force growth), keeping interest rates low and allowing the economy to grow faster than its earlier trend.  Currently, the high 4.6% Unemployment Rate means that the fast GDP pace in Q325 and expected for Q425 should not stop the Fed from maintaining an accommodative monetary policy.

Besides an accommodating Fed, the productivity-driven faster GDP Growth is a positive for corporate profits.  Consensus looks for about 8% y/y for S&P 500 earnings in Q425.  Although this is below the near-15% gain seen in  Q325, the risk is that the consensus estimate is too low.

The macroeconomic evidence supports strong corporate earnings in Q425.  Real GDP Growth looks to be up sharply on a y/y basis in Q425 (see second table below).  And the weaker dollar combined with better economic activity outside the US means that earnings from abroad should boost US company profits, as well.  These pieces of evidence are stronger in Q425 than in Q325.  Although profit margins may have been held down in Q425, as core inflation rose by less than wages, they could have been offset by the depressed pace of Payrolls -- holding down the "wage bill."  

                                                       Annualized Growth Rate                  

                            Real GDP Growth Less THW                Official Productivity Growth

Q124                                0.5                                                            1.7

Q224                                2.8                                                            2.9

Q324                                3.0                                                            2.1

Q424                                0.4                                                            1.6  

Q4/Q4                             1.7                                                             2.1    

Q125                                -1.3                                                         -1.8 

Q225                                2.3                                                            3.3

Q325                                4.3                                                            na

Q425    *                          1.7                                                            na   

Q4/Q4                              1.8                                                            na 

* Using Atlanta Fed Model's early estimate of 3.0% (q/q, saar), for Q425 Real GDP Growth and November' THW to represent Q425 average.  

                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    Mfg PMI  

          [                                y/y percent change                                                   ]          (level)

 Q124            2.9                +14.0                  0.0                              4.3           3.8              46.4 

Q224            3.0                  +2.5                +3.0                              3.9           3.4               46.3 

 

Q324            2.7                  -6.0                 +2.5                              3.8           3.2               45.3     

 

Q424            2.5                   0.0                 +3.5                              4.1           3.4               45.4       

 

Q125            2.1                  -6.5                +6.0                               3.9           3.1               47.6                                       

Q225            2.0                -16.0                +3.5                               3.9           2.8               49.3     

 

Q325            2.3                -11.0                -1.5                                3.8           3.1               50.0  

 

Q425            2.6  *            -14.0                -4.0                                3.5           2.6               53.3                                                                                        

                                                                           

* Based on the Atlanta Fed Model's latest projection of 3.0% for Q425 (q/q, saar).