What will the resumption of economic data mean for the markets?
After six weeks, the macroeconomic data that disappeared during the shutdown will begin to flow once more. The question Wall Street is asking is, will it be good, bad, or indifferent for the markets?
Readers should pay attention to the slew of expected government reports that are expected to be released this coming week. The Consumer and Producer Price Indexes, average hourly earnings, average weekly earnings, factory orders, durable goods, retail sales, housing starts, building permits, and the most important number of all, the non-farm payrolls (NFP) report, are expected to be announced on Friday. The markets are worried.
The NFP report will be critical. Investors believe that the Federal Reserve Bank will base its decision on whether to cut interest rates again at its December 10 meeting on the state of the job market. Given that missing October inflation and jobs data may never be reported, according to the White House, it leaves the markets hanging and elevates the importance of the coming deluge of data.
At present, the Federal Open Market Committee is a hung jury, split roughly down the middle between voting members who want another rate cut and those who don't. The betting markets have dropped their view of a December rate cut from almost a sure thing to a little below 50/50.
The stock market has yet to discount those lower odds but is in the process of doing that right now. The Fed has made it clear that the health of the jobs market is just as crucial as reigning in inflation, if not more so. If the number of jobs continues to rise, that will give the Fed a reason to stand down and wait. The bulls are hoping to see some job losses, but not too many, just enough to reduce rates by another quarter point.
The bears contend that employment is dropping like a stone, and the numbers will prove it. They argue the Fed will need to cut by 50 basis points. Why would that be bearish for stocks? Because it could mean that a sharp decline in job growth would indicate the economy is rolling over. That would panic the markets. Oh, the webs we weave.
As readers surely know by now, the government shutdown is over, at least until January 31. Then we get to do this all over again. If it were to happen again, markets, which had basically ignored the drama in Congress, might not be as understanding the second time around. What was the point of this one? Let me know if you figure it out. Otherwise, the country has lost billions of dollars or more in growth with nothing to show for it.
My own forecasts indicate that we will see less inflation over the next 2-3 months. While economic growth will moderate, it will not lead to a recession. Employment should decline somewhat. This is due to the ongoing labor disruption caused by the president's immigration policies and the displacement of jobs by AI. If I am right, the chances of another Fed cut are higher than the market anticipates.
On a side note, the CPI basket of items has been pared back under both the Biden and Trump administrations. The government has removed some of the worst inflationary components, including meat, coffee, new cars, trucks, and motorcycles, as well as long-term care and vehicle insurance, electricity, natural gas, and energy services. Given this list of excluded items, it is a mystery why anyone really believes that the CPI accurately reflects inflation.
Did you notice that the Trump administration is rolling back tariffs on beef, coffee, and bananas? I have been writing about how Trump tariffs are not only a tax but a tax on the food we eat, among other things. Donald Trump, his Treasury Secretary, and most Republican members of Congress have denied this, claiming that tariffs are not the cause of higher prices—until now.
Finally, the truth is coming out. Trump recently acknowledged that U.S. consumers are "paying something" for his tariffs. Don't look for him to admit the truth on his tariff taxes, especially in front of a Supreme Court decision on that subject.
In my last column, I mentioned that investors were worried that the AI boom in stocks had reached a peak. This week, we see the results of that narrative. AI darlings have led the decline, taking the rest of the market with them. Remember these two key points: the markets will remain volatile, and I expect a 4%-6% decline in the averages.
This coming week, we also have the AI King of Kings, Nvidia, reporting earnings on Wednesday. At this juncture, where Nvidia goes, the market follows. Remember, do not think 'down' when I use that word. Volatility cuts both ways, and given the global flows of money, that means both big up and big down moves. Strap in, stay invested, and hold off on buying dips for now.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.