Tariff reversal saves markets after stinker GDP, inflation reports

MANHATTAN (CN) — Markets seemed primed for a losing week until a Supreme Court ruling striking down many of the Trump administration’s tariffs caused a rebound on Wall Street.

The ruling, which found President Trump did not have emergency powers to issue unilateral international tariffs, caused a minor bump in equities even after Trump threatened to impose a new 10% worldwide tariff and some lawmakers suggested legislation codifying the import duties.

The rare rebuke of presidential power caused a reversal of fortune on Wall Street, and by the closing bell on Friday the Dow Jones Industrial Average gained 125 points, the S&P 500 increased by 73 points, and the Nasdaq netted 340 points.

“The Supreme Court decision will pave the way for accelerated rate cuts as inflation expectations from tariffs are now less of a factor,” said Jamie Cox, managing partner at Harris Financial Group. “The looming question is what new authority the administration will use to salvage some of the tariff revenue.”

The tariff decision nullified a hot inflation report from the U.S. Bureau of Economic Analysis, which showed a 0.4% increase in personal consumption expenditures for December compared with the 0.3% increase most economists had forecast.

The report, which had been delayed by the record-breaking government shutdown last fall, is considered the Federal Reserve’s preferred measure for inflation, which is bad news for those hoping for more aggressive interest rate cuts.

Similarly disappointing, the bureau’s first estimate of gross domestic product for the fourth quarter of 2025 increased by only 1.4%, much less than the predicted 2.5% increase. The GDP report also was delayed due to the government shutdown.

The report showed real GDP increased by just 2.2% last year, compared with the 2.8% increase in 2024. Fortunately, the GDP estimate for the third quarter of last year was revised upward slightly from 4.3% to 4.4%.

Economists blamed the government shutdown for the dip in GDP and predict the marker will climb in the first quarter of 2026. However, the increase in the core consumer spending inflation rate — known as PCE — back to 3% is unlikely to persuade the Federal Reserve to cut interest rates when it meets again next month.

“This report will prolong the disagreement between hawks and doves on the Federal Reserve, with the core PCE stubbornly remaining far above their 2% target, but GDP lower and job creation relatively anemic,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management.

To be sure, the Fed already seemed primed to hold fast on interest rates. Minutes released from last month’s Federal Open Market Committee meeting show a clear divide between those angling for more interest rate cuts and those wanting to see further disinflationary progress.

“Under a divided committee, the bias will be toward keeping interest rates on hold for the remainder of Jerome Powell’s tenure,” Bernard Yaros, lead U.S. economist at Oxford Economics, wrote in an investor’s note.

The minutes also indicate the central bank is starting to worry about financial stability risks, particularly related to artificial intelligence. The Fed meets again in mid-March to determine interest rates.

“We appear to be in a low-hire, low-fire environment, which is unusual, but it also shows that the economy isn’t falling off a cliff,” Zaccarelli said. “Yet there isn’t so much strength that the Fed will feel compelled to stop lowering interest rates.”

Earlier in the week, other economic data painted neither a rosy nor dismal picture of the economy.

A pair of monthly surveys from the New York State and Philadelphia Federal Reserve banks show a mixed manufacturing landscape. The Empire State manufacturing survey showed an uptick in activity, the fourth positive reading in five months, but the bank’s shipment index fell 17 points.

The Philadelphia Fed manufacturing survey increased by four points to 16.3 last month, but the bank’s employment index fell for the first time since June, dropping from 9.7 to negative 1.3. The average workweek index also dropped into negative territory, the first such reading for the index since April.

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