Weekend Update #260
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Wall Street largely brushed aside concerns over the Trump administration’s tariff regime, sending U.S. equities to all-time highs in the first trading week of the new year, even as bonds remained under pressure. The S&P 500 rose 0.6% on Friday to a record, while the Nasdaq 100 gained 1%. However, the highly anticipated Supreme Court decision on the legality of former President Trump’s sweeping tariffs was not released as expected, leaving the measures in place and prolonging uncertainty around executive authority and potential economic fallout. With the next opinion session scheduled for Wednesday (Jan. 14), markets are bracing for clarity on whether the court will uphold or strike down the tariffs—and possibly address refund mechanisms—after lower courts questioned the administration’s use of emergency powers, with prediction markets assigning only a 30% probability of a ruling in the administration’s favor.
Monetary policy uncertainty also remained front and center, as minutes from the December FOMC meeting revealed a deeply divided committee and reinforced expectations that the Fed will hold rates steady in January, with futures pricing the odds of a cut at just 5%. While some policymakers argued that easing would help prevent deterioration in labor market conditions, others cautioned that additional cuts amid elevated inflation could undermine the Fed’s credibility, resulting in widely dispersed rate projections despite investor expectations for multiple cuts over time.
On the macro front, the U.S. trade deficit unexpectedly narrowed 39% in October to $29.4 billion, the smallest since 2009, driven by a sharp pullback in imports—particularly pharmaceuticals, gold, and other industrial supplies—alongside a solid rise in exports. In inflation-adjusted terms, the goods deficit fell to its lowest level since early 2020, with notable bilateral shifts including a sharp narrowing with Ireland and wider gaps with China, Mexico, and Taiwan.
Economic momentum in the service sector remained firm, with the ISM Services Index rising to 54.4% in December, its highest level of 2025 and well above expectations. The expansion was driven by stronger business activity and new orders, while employment returned to growth, though price pressures, while slightly eased, remained elevated and continued to signal ongoing inflationary costs.
Labor market data painted a picture of gradual cooling rather than abrupt weakness. ADP reported that private-sector payrolls increased by a modest 41,000 in December, undershooting expectations, with gains concentrated in education, health services, and leisure and hospitality, while professional services and manufacturing contracted. Small businesses resumed hiring as large employers pulled back, and wage growth accelerated for job switchers to 6.6%, outpacing the 4.4% gain for workers who stayed in place.
Further signs of cooling emerged in the JOLTS data, as job openings fell to 7.15 million in November—well below expectations and the lowest since September 2024—pushing the openings-to-unemployed ratio to its lowest level since 2021. Still, a rise in quits and a decline in layoffs suggested worker confidence remained relatively intact, reinforcing the view of a softening but not sharply deteriorating labor market.
December’s nonfarm payrolls report echoed this mixed message, showing a below-consensus gain of 50,000 jobs and downward revisions to prior months, with most cyclical sectors shedding jobs and gains concentrated in leisure, hospitality, and government. At the same time, unemployment surprised to the downside as both the U-3 and U-6 rates declined, tempering expectations for near-term Fed easing and pushing markets to price in a slower pace of rate cuts.
Consumer sentiment provided a modest bright spot, rising to 54.0 in January and beating expectations, with improvements in current conditions, business outlooks, and buying conditions across major categories. Still, household balance sheet metrics weakened, short-term financial expectations softened, and inflation expectations remained mixed, leaving overall sentiment near historic lows despite the incremental improvement.
Friday’s Close (Weekly Performance)
S&P 500 6,966.28 (+1.57%)
Nasdaq 23,671.35 (+1.88%)
Dow Jones 49,504.07 (+2.32%)
Thank you Blue Room Senior Analyst NICK PEART
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