Weak Jobs, But Stocks Will Soar... so will inflation

The Fed has signaled it will lower rates. Inflation is already edging higher, and a rate decrease will push that pace.

A lot is happening, and it is happening at rapid speed:

• The Jobs data shows more economic weakness

• Inflation is edging higher as the latest data shows

• The Federal Reserve has signaled it will lower interest rates

• The tariffs have again been ruled unconstitutional, which ultimately will ease economic constraints.

Where to begin? As always, any analysis begins with the money supply to understand the push and pull of M2, along with the demand and supply of money. Then, you have a better understanding of what will happen next.

The Money Supply Continues To Increase… for now

Everyting starts with the pace of growth of the money supply. But an important thing to keep in mind is that the M2 money supply is both a cause and an effect. Our economy is consumer-driven. If the consumer is being added to payrolls, the pace of expenditures increases, and businesses respond.

Tariffs have restricted the consumer, and businesses are responding. On Friday, we got the non-farm payrolls report and the unemployment rate. Both are easing under the strains of the tariffs. Businesses are not expanding as much due to the future risks and uncertainty.

Because of this, the money supply will likely slow its pace of growth. Already, the pace is slowing from a straight-line upward trajectory:

If nothing more, the money supply growth rate may moderate to a more normal pace. This would equate to a slower pace of economic growth in GDP and employment. The tariffs will reduce growth even more.

The Tariffs Are Unconstitutional

Just before the holiday weekend, the appeals court ruled that Trump’s tariffs were unconstitutional. While I had anticipated this, it happened a lot quicker than I expected. Now, it is up to the Supreme Court.

SCOTUS may do nothing or take the case up. If the Supreme Court does nothing, it is final.

If SCOTUS takes up the case, the tariffs would remain in place for now. That could take over a year before there is a final resolution. I have always been steadfastly dubious about the constitutionality of the tariffs. I expect this to remain the case even with a SCOTUS ruling.

If SCOTUS comes back with striking down the tariffs, the consumer would get badly-needed relief. However, it may be too late for the economy by that point. The consumer may have been strained too far for too long, and the economy could easily have slipped into a self-induced recession.

Interest rates coming down at this point would not be enough to offset the stress of the upward price spike.

Inflation is Accelerating Upward

Inflation is not trending downward. CPI data hits this week, and if last month’s PPI & CPI inflation data are any indication of what to expect, we are likely to see increasing numbers.

The Federal Reserve needs to weigh its priorities. With the recent ruling on the tariffs’ constitutionality, the Fed may be able to overlook price pressures as being transitory. Therefore, the Fed would need to move quickly to stem employment declines.

Conclusion

The pace of growth for the equity markets is a result of the pace of growth in the money supply. As more and more money is created in a fractional banking system, this equates to higher revenues and profits for companies.

But the recent weakening in the jobs data suggests that employers are slowing hiring in light of the tariffs. Consumers are feeling the increases and spending less and less. Businesses are hiring fewer new employees. This means slower economic growth. It also translates into business and consumer borrowing slowing, which ultimately means less revenue for businesses.

Inflation Reports

Above is the SHY ETF, for the short-end of the Treasury yield curve. This will move even more starting this week and into next.

This week, we get inflation reports. I expect moves higher in price pressures. This will probably push the stock market down sharply, while bond yields will spike. The very next week, the Fed meets, and interest rates would likely start their descent from there.

The Fed will lower interest rates at this point. Some are now predicting a 50-basis-point decrease. If that were to occur, it would be a signal that the Fed has low confidence in future economic growth. That would rattle the markets significantly.

Stock Markets

The stock market may have a difficult time at this point. On the one hand, the Fed will be lowering interest rates. That would normally spur economic growth. It may be too little, too late for the economy. The tariffs are going to outweigh any offsetting done by the Fed. With the consumer slowing significantly, and notwithstanding the performance of a few select stocks more involved in AI than the broader economy, the remaining 495 stocks could sell off, pulling the overall stock market lower.

US Dollar Index

Very few scenarios I envision have the dollar index performing well. If interest rates indeed go lower, the dollar follows downward. Terms of trade will decline for US consumers. This, in turn, will mean higher price pressures.

This will mean more competitiveness for US companies. The problem with that is that a minuscule number of companies produce products that are entirely made in the USA. Input costs will still be affected.

The other part of this is that since nearly everything is purchased from abroad, everything will be more expensive because of deteriorating terms of trade with a lower dollar. This, too, is inflationary.

Gold

Inflation is happening. The price of gold has been soaring. With a declining US dollar and interest rates moving lower, the Federal Reserve will need to act quickly in order to get the economy moving forward. Lower interest rates will do its part to spur economic growth, and it may be that the ever-increasing money supply… Up to a point.

I wonder on the overall price of gold over the longer term. If the tariffs go away, and the Fed has lowered interest rates, if economic growth declines appreciably, gold simply may not move higher anymore. Profit taking may ensue.

While I have some precious metal holdings, I am watchful as to what is next. I think gold has a lot more upside potential for now, but there will likely be a point when the price stops moving higher. Worldwide central banks have been buying gold heavily as a result of diversification out of the US dollar. This will likely keep some upward pressure on the price of gold. But I am leery of a potential significant price correction at some point.