Market Stabilization

The stock market may stabilize this week, as the macroeconomic background may be improving and an end to the government shutdown remains a potential positive.  As for the monetary policy outlook, this week's Fed speeches are not likely to tilt the odds of a rate cut at the December FOMC Meeting one way or the other, as they most likely will stick to the positions taken at the last meeting in September.  So, uncertainty about a December rate cut should remain, particularly as the balance of risks may be shifting.

There is a lot of evidence that the economic weakness seen during the summer is over, which would reduce the downside risk to the labor market.  Besides the pickup in the ADP measures of job growth, most commodity price indices, such as CRB, have moved up from their August lows.   The indices could be responding to stronger economic activity.  It also may be telling that longer-term Treasury yields have been steady, contrary to the decline that would be associated with a weaker economy.  There could be further evidence of an improved labor market when ADP releases it's bi-weekly 4-week moving average on Tuesday.  The question is whether it will exceed the 14.25k in the latest report, adding to the more positive evidence regarding the labor market.  Or, will it weaken, reflecting the large layoff announcements highlighted by the Challenger Report, many or which are likely AI-related?  

What may be more important for the Fed would be a benign October CPI Report (assuming it will be released at some point), suggesting lower upside risks to the inflation outlook.  At this point, the evidence is mixed.  Anecdotal evidence suggests that businesses will begin to pass through the tariffs soon.  So, the Fed will likely be interested to see if the pass-through is significant enough to show up in the CPI.  However, private surveys suggest little change in price inflation in October.  Inflation Expectations, as measured in separate surveys by University of Michigan and New York Fed, are contained.  The Price component of the Mfg ISM slipped.  The Manheim Used Car Price Index fell.  And, the ADP measure of Pay Growth shows steady wage inflation.  If these survey results are correct, the next CPI Report (presuming it will be released) may be the trigger for a December rate cut.

The irony of Trump's tariff policy is that while it may have given the US a "stick" to use in foreign policy, it cut domestic support for the Republican Party by hurting the US consumer through higher prices -- particularly food prices.   The Democratic Party used the "affordability" argument to win some key elections last week -- even though their policy prescriptions may, in fact, worsen the economic situation.  And, Trump and his advisors appear to understand the political problem:  Although Trump disputed the "affordability" argument, he announced a Department of Justice anti-trust investigation into meat pricing.   It remains to be seen what the Supreme Court will decide regarding Trump's tariffs and what he may do in their place if the Court decides his actions were unconstitutional.  An end of the tariffs would lower the Fed's and market's inflation risks substantially.