Stock Market Correction In Play?

The stock market faltered last week as a result of an external event -- killing of Iranian General Soleimani -- and soft US economic data -- Mfg ISM.   These factors -- fallout from the killing and more soft data -- will likely persist in the coming week, leading to a deepening of the stock market correction that may have begun last week.  So-called news analysis and possibly more rhetoric from Iran should dominate headlines.  A soft December Employment Report on Friday is the risk, as well.  
While news analysts will probably continue to fret over the potential negative fall-out from the killing, the truth is more likely that no one knows what will happen.  Nevertheless, risk of a disruption in the Middle East oil supply should keep oil prices elevated for awhile.

While the expansion of oil production in the US through fracking has made the net effect of higher oil prices neutral in terms of Real GDP, since a positive reaction in production would offset a negative reaction in consumption, this might not be the case now.  This is because there may not be an immediate and strong boost to US oil production in response to the higher oil prices.  A significant response presumably would require an expectation that the higher prices will persist for a long time.  Meanwhile, higher gasoline prices will be a drag on the consumer.  Each $1/bbl increase in price should translate into 2-3 cents per gallon of gasoline and subtract about $3.5 Bn (annualized) from consumer purchasing power on other goods and services.  So, the net effect of the higher oil prices could be negative in terms of Real GDP in the near term.

The December Employment Report should be soft.  The Unemployment Claims data point to a slowdown in Payrolls from November +265k print.  Consensus looks for +160k m/m, which is below the +205k prior 3- month average.  But, the risk is for an even bigger slowdown, based on the Claims data.  Note that the ADP Estimate, due Wednesday, may be too high as it catches up from its bad miss in November (+67k). 

Other parts of the Report may come in softer than consensus, as well.  While there is no reliable evidence to predict the m/m direction of the Unemployment Rate, the weaker Claims data suggest the risk is for an uptick rather than the steady 3.5% consensus estimate.   Also, calendar considerations suggest a 0.1-0.2% m/m Average Hourly Earnings rather than the 0.3% consensus estimate.  The y/y would be 2.9-3.0% versus 3.1% in November (which is also the consensus estimate).