Stock Rally To Continue?

The stock market may continue to rally this week, as resolution of the tariff issue appears to be moving ahead.  The market is likely to become more focused on the fall-out from the tariffs.  There are two questions:  /1/ What is the direct boost to inflation and hit to economic activity? /2/ Will the direct hits develop into a wage-price spiral and/or recession.  It will take time to answer them.  So, the questions should be more in the background for awhile.

The direct hit to prices from tariffs begin mostly in May.  While there should be a lot of anecdotal evidence regarding their impact on prices, the May CPI will be released in June.  Meanwhile, the April CPI, due May 13,  risks being benign, held down by the pass-through of lower oil prices and anticipatory price cutting by motor vehicle companies.  The April Employment Report shows that wage inflation remains subdued, which should help hold down the CPI, as well.

The April Employment Report also suggests that economic activity was set to bounce back in Q225 ahead of the tariffs.  The +177k m/m increase in Nonfarm Payrolls exceeded the +164k 2024 average.  Total Hours Worked in April were 2.0% (annualized) above the Q125 average, a speedup from +0.8% (q/q saar, revised up from 0.5%) in Q125.  The jump in Initial and Continuing Claims in the last week of April, however, raised the risk that the bounce-back will be short lived.  To be sure, it is somewhat suspicious that both Initial and Continuing jumped in the week.  Continuing tends to lag Initial.  Some technical factor may have been behind both jumps.  So, their higher levels have to confirmed in this week's release.

The -0.3% dip in Q125 Real GDP also looks suspicious, since most of the weakness was in a surge in imports ahead of the tariffs.  It would seem reasonable that most of the surge should have found its way into inventories.  (To be sure, some of the import surge fed into business equipment spending, part of which is calculated directly from net imports.)  While inventories were up a lot, the surveys from which they are measured may not have picked up all of them.  It remains to be seen whether inventory investment gets revised up significantly.  If not, it wouldn't be the first time that sharp changes in Net Exports had questionable impacts on GDP.

So far, the Payroll data do not show a significant number of job cuts in the federal government.  They fell 9k in April and down 26k since January.  One reason is that the 75k workers who are receiving ongoing severance pay are counted as employed.  There should be a large drop in Federal Government Payrolls once their severance pay ends.