Below are the economic and market highlights for the week:
- Progress on inflation hit a wall in November. The CPI Index rose 0.30%, matching the biggest increase since April. That helped push the 12-month inflation rate to 2.70% from 2.60% in October. Core CPI, which excludes volatile food and energy costs, also rose 0.30% in November. Despite the rise, the yearly core rate was unchanged at 3.30%. Shelter costs accounted for much of the increase, rising 0.30% for the month. Consumers, however, also saw prices increase for food, energy, and used and new vehicles.
- Producer prices were also too hot for the market’s liking since they ultimately feed into consumer prices. The PPI Index, which tracks wholesale prices, increased 0.40% in November, topping estimates of a 0.20% rise. That pushed annual PPI to 3.00%, its biggest advance since February 2023. Excluding food and energy, core PPI rose 0.20% month-to-month. On a 12-month basis, prices were up 3.50%, also the most since February 2023. Goods prices accounted for much of the headline increase, jumping 0.70% on the month. About 80% of the move in goods prices was due to a 3.10% surge in food prices. Within food prices, a 54.60% increase in chicken eggs due to the bird flu outbreak as well as higher prices for dry vegetables, fresh fruits and poultry pushed prices higher.
- Optimism among small business owners hit its highest point since June 2021. The NFIB Small Business Optimism Index hit 101.7 for November. That was eight points higher than the previous month. Of the 10 Optimism Index components, nine increased and one was unchanged. Key findings showed small business owners were hopeful beneficial tax and regulation policies, as well as slowing inflationary pressures, will help them expand their operations in the coming year.
Rising Prices Stall Santa Rally
Twelve days ‘til Christmas and bulls hit pause as a rebound in consumer and producer prices threaten to be the Grinch, stealing a Christmas rally. A jump in producer prices reported on Thursday threw cold water on investor enthusiasm, a day after they had pushed the Nasdaq Composite Index to a new high. A breakthrough in quantum computing led the Nasdaq to break through the 20,000 level for the first time ever on Wednesday. Google parent Alphabet unveiled this week its revolutionary quantum computing chip. The chip could help develop systems that perform at speeds far faster than traditional silicon-based computers. Quantum computing is seen as the next frontier for many tech companies, helping reduce errors exponentially and leading to major breakthroughs and discoveries across industries. Mag 7 stocks moved higher on the news, breathing new life into the tech stock trade. However, Thursday’s hotter than expected PPI report on the heels of a sticky consumer price report prompted traders to take profits. Bonds markets also sold off on the inflation news ahead of the Fed’s meeting next week. As a result, the 10-year U.S. Treasury yield topped 4.40% on Friday, its highest level since Nov. 25.
Now that we are halfway through December trading, stocks have struggled to find direction following a solid post-election run. The culprit this week was a rebound in prices, suggesting inflationary pressures may not be behind us after all, disrupting rate cut expectations for 2025. Although much of the increase is attributable to food prices due to the bird flu outbreak and strong seasonal demand, we continued to see sticky prices elsewhere – particularly shelter prices. The increase also coincides with the busy holiday shopping season. While many indicators still remain solidly positive for the economy, household budgets for food, energy, and shelter could lead consumers to cut back on their holiday purchases as we close out the holidays. Markets are likely to remain volatile given the most recent inflation reports, compounded by uncertainty over how the new administration’s trade policies will bear on matters. Next week the Fed will convene for its final meeting of the year and traders will be paying close attention. We don’t expect this week’s inflation reports to deter the Fed from cutting another 0.25%, but bond yields are already rising in anticipation of a slower 2025 rate cutting cycle.
The Week Ahead
The Federal Reserve holds its last FOMC meeting of the year. In economic news, retail sales, housing, and Flash PMIs are the highlights of the week.
Federal Court Halts Corporate Transparency Act
The Corporate Transparency Act (CTA) that was passed in 2021 and went into effect January 1, 2024, requires businesses to disclose their Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury. The federal government argues that the law will help combat financial crimes, such as money laundering and tax evasion, by tracking the individuals who ultimately control or benefit from certain business entities, especially small LLCs and partnerships. The law generally applies to businesses with less than $5 million in revenues and fewer than 20 employees. The information to be reported includes business name and any “doing business as” names, address(es), jurisdiction of formation, IRS taxpayer identification number(s), names of owners, dates of birth, owner addresses, owner identification documents such as passports, driver licenses, etc. Reporting companies are also obligated to provide updated reports within 30 days of the change of any previously filed information. According to FinCEN, “a beneficial owner is an individual who either directly or indirectly exercises substantial control over the reporting company or owns or controls at least 25% of the reporting company’s ownership interests.” The filing deadline is January 1, 2025, and the law is estimated to affect more than 32 million businesses. Individuals who willfully violate the requirement may be subject to fines of $10,000 or more and possible jail time.
The CTA has sparked significant debate and legal challenges over its constitutionality and scope, raising concerns about the undue compliance burden and cost placed on small businesses, in addition to concerns about privacy and who can access the data and how it may be used or shared. Under the CTA Access Rule, FinCEN and the U.S. Department of Treasury may share BOI data with federal agencies engaged in national security, intelligence, or law enforcement activity – both domestic and foreign, including judges, prosecutors, and other authorities, as well as financial institutions with customer due diligence requirements and regulators supervising them for compliance with such requirements.
Another challenge under the CTA is that many small businesses are unaware of the requirement or do not know if they meet the requirement to file. It is estimated that roughly 9.5 million filings have been reported as of December 1st, which is about 30% of the total. The federal government has claimed that the legislation falls under its authority to regulate interstate commerce. Critics argue that the entities covered under the law rarely engage in interstate commerce. The National Small Business Association, a nonprofit organization that represents the interests of small businesses and entrepreneurs, and one its members, Isaac Winkles, brought suit against the U.S. Treasury, Janet Yellen as secretary of the Treasury, and Himamauli Das as acting director of FinCEN, challenging the constitutionality of the CTA. In the case of Nat’l Small Bus. United v. Yellen, the court found for the plaintiffs and prohibited FinCEN from enforcing the CTA against them, ruling that the CTA exceeds the authority granted to Congress under the Constitution as it relates to each of Congress’s powers (i) over foreign affairs and national security, (ii) under the Constitution’s Commerce Clause, and (iii) over taxes. However, the ruling in that case was narrow, applying only to the plaintiffs. Additional lawsuits have been filed across the country that challenge the constitutionality of the CTA using similar arguments.
Last week, a federal district court in Texas also found the legislation to be unconstitutional and issued a preliminary, nationwide injunction blocking enforcement of the CTA, not just for the plaintiffs, but for all reporting companies. Notably, the plaintiffs did not request a nationwide injunction and only requested the injunction cover the plaintiffs. In the case Texas Top Cop Shop, Inc., et al v. Garland et al, the court cited concerns that the law’s reach could violate constitutional protections related to privacy and burdensome regulatory requirements. The plaintiffs argued that the CTA intrudes on States’ rights, compels speech, and burdens the right of association. Furthermore, it impermissibly compels disclosure of private information. The court stated that neither the CTA nor the reporting rule may be enforced, and reporting companies need not comply with the January 1, 2025 BOI reporting deadline pending further order from the court. The court’s ruling framed the CTA as a law enforcement tool rather than an instrument intended to protect commerce and stated that a company’s ability to operate anonymously is not economic activity. However, the ruling conflicts with decisions made in federal district courts in several other states which have held that the CTA may be within Congress’ powers.
After the injunction was filed by the federal court in Texas last week, FinCEN issued the following statement: “In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.” The U.S. government filed a notice to appeal the Court’s order on December 5, 2024, which will move the issue to the U.S. Court of Appeals. If the Attorney General requests a stay of the preliminary injunction during the appeal process, businesses may still be required to file before January 1, 2025.