Good morning investors,
The first Monday of earnings season brings unprecedented drama as federal prosecutors threaten Fed Chair Jerome Powell with criminal indictment over building renovations, a transparent attempt to force rate cuts that sent futures tumbling. Gold hits fresh records above $4,600 as investors flee to safety amid the gravest threat to Fed independence in modern history.
Bank stocks crater with Capital One down 11% and JPMorgan off 3% after Trump's call for 10% credit card rate caps threatens core revenue streams. With CPI Tuesday and bank earnings kicking off, markets face a critical week determining whether fundamentals can overcome political chaos.
Opening Bell: Fed Independence Under Attack
Dow ($DIA ( ▲ 0.56% )) futures plunge 368 points with S&P ($SPY ( ▲ 0.76% )) and Nasdaq ($QQQ ( ▲ 1.3% )) futures down 0.6% and 0.8% respectively as Powell's criminal investigation escalates Trump's pressure campaign. The VIX spikes as traders scramble for protection, with gold surging 2% to new all-time highs above $4,600 per ounce.
Bank stocks lead the carnage - Citigroup down 4%, JPMorgan and Bank of America off over 2%, Capital One crashes 11%. The 10% credit card rate cap proposal would devastate fee income just as earnings season begins.
Powell's Defiant Stand
The Fed Chair's extraordinary video statement Sunday evening laid bare the stakes: "This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation."
The nominal allegations about $2.5 billion in building renovations are pretextual. As Powell stated clearly: "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."
Whatever your politics, the principle is simple: A credible Federal Reserve is essential for growth, price stability, and functioning capital markets. I support that independence.
Credit Card Cap Chaos
Trump's 10% rate cap proposal starting January 20 would require Congressional approval but threatens massive disruption. Critics correctly note this would cause banks to pull back lending, paradoxically hurting the consumers it claims to help.
Buy now pay later stocks like Affirm surge 5% as investors bet consumers would shift to alternative lenders. The timing couldn't be worse, attacking bank profitability just as they report earnings that set the market tone, but this could help a lot of people with credit card debt that is hurting their ability to grow their net worth at all.
Labor Market's Grim Reality
Friday's jobs report revealed 2025 as the worst year for job growth outside recession since 2003, just 584,000 jobs added versus over 2 million in 2024. The 4.4% unemployment rate masks deeper dysfunction with youth unemployment at 10.4% and long-term unemployment surging.
The "low hire, low fire" freeze continues with new graduates and job changers finding minimal opportunities. As BlackRock's Rick Rieder notes: "U.S. growth is solid, broad based labor is not really participating in this economic vitality."
Productivity Paradox Powers Profits
The economy's generating more output with fewer workers, with Q3 productivity surging nearly 5% annually while hours worked barely budged. This creates the perfect setup for corporate margins: falling unit labor costs, easing inflation pressure, expanding profitability.
Ed Yardeni's "Gen-Shaped Economy" thesis explains the disconnect - Baby Boomers' $85 trillion net worth (one-third in equities) supports consumption regardless of employment weakness. The stock market reinforces demand rather than responding to it.
Bank Earnings Preview
JPMorgan kicks off earnings Tuesday with expectations for another blockbuster year. Three themes dominate: investment banking revival from strengthened deal pipelines, resilient net interest margins despite rate stabilization, and steady trading revenues from late-2025 volatility.
The bar sits high after banks rallied into earnings. Investors demand clarity on deposit costs, loan demand, M&A pipelines, and especially commercial real estate credit quality. Strong results could validate risk-on positioning; disappointments would cascade broadly.
Week Ahead Critical
Tuesday's CPI and Wednesday's PPI arrive at the worst possible moment, with political attacks on the Fed make any inflation surprise potentially explosive. Consensus expects 0.3% monthly gains keeping annual rates near 2.7%, but deviations could trigger outsized reactions.
Taiwan Semiconductor reports Thursday, offering crucial insight into AI infrastructure spending. Goldman Sachs and Morgan Stanley round out bank earnings providing capital markets color.
Airlines Consolidate
Allegiant's $1.5 billion acquisition of Sun Country creates a leisure-focused competitor to the Big Four controlling 70% market share. The 20% premium and $140 million projected synergies suggest confidence in consolidation benefits despite industry headwinds.
Final Thought
This week marks an inflection point where political interference collides with market fundamentals. Powell's criminal investigation represents the most serious threat to Fed independence since its modern structure emerged. Markets correctly interpret this as attacking the foundation of American financial credibility.
The immediate reaction, stocks down, gold up, dollar weakening, shows global investors applying risk premiums to U.S. assets. There is now the reemergence of the sell America trade, similar to April's tariff shock. This isn't hyperbole - it's rational repricing of political risk, but I think it is too early to sell the US. We are in the middle of a market change which rarely comes around. An AI revolution, and the US companies look to dominate this space.
Earnings season arrives with expectations for 8.3% profit growth and accelerating momentum. The disconnect between strong fundamentals and political chaos creates unprecedented volatility. Banks reporting into credit card cap threats, CPI data amid Fed attacks, and global markets questioning U.S. stability.
The productivity boom enabling profit growth without hiring provides cushion but can't offset systemic risk. Companies generating more with less supports margins but doesn't address the frozen labor market leaving millions behind. This divergence between capital and labor widens dangerously.
Powell's term expires in May, making this a five month battle for monetary policy control. Markets must price the probability of a politically compromised Fed pursuing inflationary policies to please the President. Gold's record highs suggest smart money already hedging this scenario.
As always, feel free to reach out with questions about navigating this unprecedented environment.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.