A Less Problematic Trump?

The stock market may be buoyed over the next couple of weeks by favorable corporate earnings reports and relief that Trump's tariff plan may not be as disruptive as feared.   In addition, Trump's intention to ease regulations and extend his earlier tax cuts should be supportive in the background.  It could add to a relief bounce on the peaceful transition of power on Inauguration Day.

News reports indicate that Trump's advisors are discussing a number of ways to implement tariffs to mitigate their inflationary impact.  These include a gradual pace of small increases over months, carve-outs for some industries, and temporary tariffs whose purpose is to persuade a country to change its approach to border control and drug trafficking.  Any moderation in tariff implementation would likely be viewed positively by the markets for having a smaller inflationary impact.

To be sure, a tariff would not only boost import prices (with the caveat that importers may not pass them through and that the stronger dollar will be a partial offset) but also prices in domestically-produced substitutes.  Demand would shift away from imports to the latter, allowing firms in that industry to raise prices.  The latter's increased revenue could boost profits or wages or both.

Corporate earnings should be helped by the strong economy.   The Atlanta Fed model's latest estimate is 3.0% for Q424 Real GDP Growth.  The Claims data indicate the labor market continued to strengthen in early January.  Initial and Continuing Claims so far are below their December averages.    

Meanwhile, inflation ended last year on a soft note.  The 0.2% m/m Core CPI in December showed a further increase in the share of components with 0.2% or lower prints.  Upcoming inflation reports for January and February will be important, as they will show whether there is any moderation in the typical start-of-year price hikes.  Last year, the Core CPI rose 0.4% in both months.  It is a potential window for a notable decline in the y/y pace for the Core CPI.  The latter was 3.2% in December.

                               Number of Major Core CPI Components 

                                   0.2% or Less                     0.3% or More

          Dec                   11              5

      

        Nov             9           7

Oct                                     7                                         9                                 

Sep                                    9                                         7

Aug                                  13                                         3

July                                    8                                         8

June                                 13                                        3

May                                  11                                        5