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