Markets Face First Major Test: Jobs Data and Tariff Ruling Could Trigger Volatility

Market Preview: Jobs Report and Tariff Ruling Loom

Investors face their first significant test of the new year on Friday as they await two critical events: the release of December’s U.S. Non-Farm Payrolls report and a potential Supreme Court ruling on the legality of most of President Trump’s tariffs.

A Fragile Calm in Markets

While U.S. equities, Treasury bonds and the U.S. Dollar have traded relatively calmly the first week of January, I sense that the current calm may be a little fragile, particularly in the stock market, given elevated valuations and the market’s potential sensitivity to major economic news events and policy decisions.

This week started with two major geopolitical developments – the Trump administration’s capture of Venezuela’s president and the subsequent move to take over Venezuela’s oil supply. However, the stock market showed little stress with the Dow and S&P 500 reaching new all-time highs. Stock market leadership also rotated with energy, banking and healthcare moving to the forefront and technology taking a backseat, but without triggering elevated volatility. I see it as a “what, me worry” response, while strategist Michael Arone of State Street Investment Management describes it as “a little too quiet,” raising the odds of a volatile reaction once new catalysts arrive.

Options Market Signals Potential Turbulence

The proof could be in the numbers, however. According to Interactive Brokers strategist Steve Sosnick, options pricing suggests that traders are bracing for a potentially turbulent session. He cited at-the-money S&P 500 options expiring Friday implying a roughly 0.9% move in either direction.

Additionally, the Cboe Volatility Index (VIX) has also risen to 15.5 even as equities remain firm. This unusual divergence is a sign that investors expect renewed volatility ahead. Sosnick also sees the option market as somewhat complacent, creating a cushion for shocks tied to the employment report or the pending Supreme Court decision.

December Jobs Report: What to Expect

Let’s look at the jobs report first. Economists surveyed by the Wall Street Journal expect the report to show 73,000 new jobs, up modestly from November’s initial 64,000 reading. Unemployment is forecast to ease slightly from 4.6% to 4.5%.

A stronger-than-expected report could reduce the likelihood of multiple Fed cuts this year, potentially halting the market’s early-year rally. Conversely, a significantly weaker report could reignite concerns about slowing economic growth and shift the focus to the validity of the market’s current lofty valuations.

A moderate report or what traders call the “Goldilocks numbers”—steady hiring and stable unemployment—offers the best chance for stocks to hold their gains.

Supreme Court Tariff Decision

The second major event today is a possible Supreme Court ruling on Trump’s tariffs. The Court designated Friday as an opinion day, raising the likelihood of a decision. Prediction markets on Polymarket assign only a 24% chance that the Court will uphold the tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Lower courts previously ruled that Trump exceeded his authority in applying the law to implement widespread, country-specific duties.

Many stock strategists believe the decision has already been priced into the stock market. However, if tariffs are struck down, we expect weakness in the U.S. Dollar and further steepening in the Treasury yield curve, as short-term rates fall in response. Without the tariffs, however, the case for the Federal Reserve to begin cutting interest rates could be strengthened.

Conversely, if the tariffs remain intact, risk assets could benefit. Analysts see the tariffs as an important source of revenue for a country facing a huge deficit. Furthermore, the inflationary impact from the tariffs has not hurt economic expansion.

Conclusion: Bracing for Volatility

In conclusion, the labor market report and the tariff ruling represent the year’s first major inflection point for financial markets. Elevated equity valuations, uncertain government policies and shifting expectations around Federal Reserve actions heighten the stakes.

Traders should brace for a day aware that either event could trigger large swings across equities, bonds and currencies. The retail sector will also be exposed to the possibility of elevated risks. The start of the new year has been relatively stable, but Friday’s catalysts may determine whether the stability continues or marks the end of the calm start of the year.

More Information in our Economic Calendar.