The stock market may be beginning to adjust to two developments: /1/ a lower probability of Fed easing ahead and /2/ a reaction of other countries' trade policy to Trump's tariff regime. The latter is probably the more significant market negative. It could hurt stocks through a weaker dollar and higher longer-term yields. Strong US economic growth and corporate earnings, however, may temper any downward adjustment by stocks.
This week's key US economic data are expected to be on the stronger side, reinforcing the Fed's decision last week to keep the funds rate steady and downplaying the possible need for easier monetary policy ahead. Both the Mfg ISM and Nonfarm Payrolls are expected to improve in January -- despite the cold/snowy weather in parts of the country. However, the implication of steady monetary policy should not be a problem for the stock market as long as economic growth is strong. The latter ensures continued solid corporate earnings. Moreover, as "insurance," the Fed would be ready to resume easing if the economy weakens.
Consensus looks for the Mfg ISM to rise to 48.3 in January from 47.9 in December. This would be its highest level since September (49.1). Some of an increase could be catch-up, since gains in both Durable Goods Orders and Manufacturing Output (part of Industrial Production) suggest the December Mfg ISM was too low -- although the weakest component that month was Inventories, not New Orders or Production.
Consensus looks for Nonfarm Payrolls to speed up to +70k m/m from +50k in December. Unemployment Claims data support the idea of a speedup, particularly Continuing Claims which fell a good deal since the December Payroll Survey Week. Consensus also looks for a trend-like 0.3% m/m increase in Average Hourly Earnings. Its y/y would fall to 3.6% from 3.8%. However, there is more than typical uncertainty surrounding these estimates this month because the data (based on the Establishment Survey) will embody benchmark revisions, new seasonal factors and a new "birth-death" model to account for jobs created and lost when companies start and end. It will be interesting to see if the Fed's estimate of a 60k overstatement of m/m changes in Payrolls will show up after these technical changes have been made.
The Unemployment Rate will not be affected by these technical changes because it is measured from data collected in the Household Survey, whose annual revisions were incorporated in the data last month. Consensus looks for a steady 4.4% Unemployment Rate. Rounding analysis suggests a steady Rate is more likely than a decline. Since the Rate's un-rounded level was 4.44% in December, it will take a full 0.1% pt decline to get to 4.3%. Nevertheless, a decline in the Rate should not be ruled out, given the drop in Continuing Claims.
The moves by Canada and Europe to negotiate lower tariffs with China and India may be a greater problem for the stock market. Their moves are logical reactions to the tariffs imposed by the US. Since the latter will likely reduce their exports' share of the US market, it makes sense for them to find other markets to sell into.
The channel to the stock market runs through the FX and longer-term Treasury market. The countries' shift away from the US could reduce the role of the dollar in international trade, lowering its value in the FX market. A weaker dollar can have inflationary consequences and thus boost inflation expectations. The latter, in turn, could lift longer-term Treasury yields. So could the fewer foreign-earned dollars available to buy Treasuries. The higher yields are a negative for stocks. To be sure, a weaker dollar also makes profits earned abroad more valuable in dollar terms. However, the broader negative impact from higher longer-term yields would probably dominate.
