We had the second post-election small business optimism report this morning. And as we suspected back in November, a repeat of the Trump effect is back for small business.
Optimism surged again in December, to a six-year high …
This surge of the past two months was after spending 34 consecutive months UNDER the 50-year average.
And as you can see in this next chart, small business earnings is coming off of the lowest levels since the Great Financial Crisis.
So, the past four years have been good for Wall Street, but haven't been good for small business.
But notably, the highest point on this small business earnings chart was delivered by the first Trump administration. And this recent survey says small business owners expect better growth, lower inflation and better business conditions under Trump (2.0), but they expect it to be "a bumpy ride."
We get CPI tomorrow, and we hear from three of the four big banks on Q4 earnings.
This will kick off what is expected to be the highest earnings growth quarter in three years.
So, there will be a lot for markets to digest tomorrow. In the case of a hot inflation number and hot earnings, we should expect the trajectory of this chart to be most important.
We've talked about this 5% level for the 10-year yield (likely the danger zone for financial stability and fiscal sustainability). This is where the Fed flipped the script in October of 2023, and signaled the end of the tightening cycle, suggesting that the bond market had done the tightening for them.
That said, look where inflation expectations were at that time, relative to now …
As we discussed yesterday, if bond yields test the 5% level again, we should expect the Fed to quickly swing the pendulum to unanimously dovish, and be vocal about it, in order to talk bond yields down.