Stocks took a beating and bond yields spiked, accompanied by a stronger dollar, as traders abandoned hopes for Federal Reserve interest rate cuts this year following an unexpectedly robust jobs report.
In the stock market, earlier gains for 2025 were wiped out, with the S&P 500 suffering its most significant downturn since December 18. Back then, the Federal Reserve unsettled markets by cautioning against accelerating rate cuts. Riskier sectors, such as small caps, saw declines, plummeting nearly 10% from previous peaks. Meanwhile, Treasuries experienced a downturn, with 30-year yields briefly surpassing 5%, and the market now anticipates less than 30 basis points of Fed rate reductions this year.
December witnessed a remarkable increase in jobs—the highest since March—and an unexpected drop in unemployment, rounding off a surprisingly strong year for the U.S. economy. However, rising inflation expectations caused concern, reaching their highest since 2008, further exacerbated by surging oil prices.
Neil Birrell from Premier Miton Investors commented on the unexpected start to the year, observing, “The robust economy is not good news for those hoping for rate cuts, as inflation remains a priority for the Fed. Bond yields are set to rise, impacting equities negatively. Could we really see a 5% yield on the 10-year Treasury?”
At Interactive Brokers, Steve Sosnick highlighted traders’ reliance on liquidity, noting, “Stock traders are more concerned about potential monetary accommodation rather than a strong economy benefiting corporate fundamentals.”
The S&P 500 decreased by 1.5%, hanging close to its 100-day moving average, the Nasdaq 100 dropped 1.6%, and the Dow Jones Industrial Average lost 1.6%. The “Magnificent Seven” megacap stocks fell 1.2%, while the Russell 2000 index for smaller companies tumbled 2.2%. Wall Street’s volatility indicator, the VIX, spiked towards 20.
The yield on 10-year Treasuries increased by seven basis points to 4.76%, and the Bloomberg Dollar Spot Index climbed 0.5%.
In response to the strong job figures, some leading banks revised their expectations for future Fed rate cuts. Bank of America Corp. no longer anticipates any reductions this year and sees a risk of potential hikes. Citigroup Inc. still hopes for five cuts starting in May, despite having one of the most optimistic outlooks on Wall Street. Goldman Sachs Group Inc. now expects two rate cuts instead of three.
Seema Shah from Principal Asset Management stated, “The Fed is likely to remain inactive in January unless unexpected inflation or job market changes occur in March. The strong U.S. jobs report presents challenges for global bonds, and the peak for yields hasn’t been reached yet.”
Since the Fed initiated its rate-cutting cycle in September, Treasury yields have been climbing, fueled by a robust U.S. economy. This has pushed the 10-year yield over 100 basis points higher than before the rate cuts began, leaving bond investors facing the possibility of approaching the elusive 5% threshold.
The recent increase in Treasury yields is mainly due to real rates, indicating higher growth expectations, as explained by Gennadiy Goldberg at TD Securities. Gina Bolvin from Bolvin Wealth Management Group advised investors, “Brace for more volatility as market expectations for fewer rate cuts adjust.”
Chris Zaccarelli at Northlight Asset Management emphasized that while lower rates aren’t necessary for market growth, a Fed inclined to ease policy is always more favorable for equity investors than one tightening or maintaining current policies. He added, “To justify high valuations, earnings need to improve across sectors, not just among major tech companies, so caution is warranted in the short term.”
Lara Castleton from Janus Henderson Investors expressed that those hoping for a broader market rally beyond megacaps were left disappointed by the latest data. Guy Stear at the Amundi Investment Institute indicated rising yields may pressure equity markets unless there’s a strong Q1 earnings season: “The pressure on the Fed makes cutting rates less likely, and yields may approach 5% in the coming months.”
Bret Kenwell at eToro noted, “While the market might not favor the latest jobs data, a strong labor market is a foundation we shouldn’t overlook, even if it means adjusting rate-cut expectations.”
Scott Helfstein at Global X remarked that positive economic news often appears negative for markets but argued this perspective is short-sighted: “We believe strong corporate earnings driven by innovation, like AI and deregulation, will propel equities forward rather than Fed actions.”
As earnings season picks up next week, the financial sector is under the spotlight, with banks like JPMorgan Chase & Co. and Wells Fargo & Co. anticipated to report gains in trading and investment banking, compensating for declines in net interest income due to increased deposits and reduced loan demand.
Upcoming inflation data is crucial as December’s consumer price index is expected to show a third consecutive monthly rise to 2.9% on January 15.
Ellen Zentner at Morgan Stanley Wealth Management pointed out, “The unexpectedly strong jobs report likely won’t make the Fed less hawkish. All attention now shifts to next week’s inflation data, but even weaker-than-expected figures might not encourage impending rate cuts.”
Regarding corporate developments, Tesla Inc. refreshed its popular Model Y, adding a Cybertruck-inspired design element. Hewlett Packard Enterprise Co. secured a substantial contract exceeding $1 billion to provide AI-optimized servers for Elon Musk’s X social network. Nvidia Corp. criticized impending chip export restrictions, describing them as a last-minute move to challenge the incoming Trump administration. Delta Air Lines Inc. exceeded profit expectations for late 2024, buoyed by gains in both domestic and international markets, with momentum expected to continue into the new year. Walgreens Boots Alliance Inc. reported better-than-expected quarterly sales, boosting shares and alleviating pressure as it contemplates strategic moves, including a potential sale. Constellation Energy Corp. agreed to purchase Calpine Corp. for $16.4 billion, forming the largest fleet of U.S. power stations. Additionally, a planned joint sports streaming service from Walt Disney Co., Fox Corp., and Warner Bros. Discovery Inc. has been abandoned to concentrate on current online offerings. Synopsys Inc. obtained conditional approval from the European Union for its proposed $34 billion acquisition of software firm Ansys Inc., after easing regulatory concerns.
Let’s summarize the recent market movements:
### Stocks
– The S&P 500 dropped by 1.5% as of 4 p.m. in New York.
– The Nasdaq 100 decreased by 1.6%.
– The Dow Jones Industrial Average shed 1.6%.
– The MSCI World Index declined by 1.5%.
– Bloomberg’s Magnificent 7 Total Return Index dipped by 1.2%.
– The Russell 2000 Index slid by 2.2%.
### Currencies
– The Bloomberg Dollar Spot Index gained 0.5%.
– The euro decreased 0.5% to $1.0245.
– The British pound fell 0.8% to $1.2210.
– The Japanese yen increased 0.3% to 157.72 per dollar.
### Cryptocurrencies
– Bitcoin rose 2.8% to $94,655.51.
– Ether climbed 1.7% to $3,261.71.
### Bonds
– The 10-year Treasury yield climbed seven basis points to 4.76%.
– Germany’s 10-year yield added three basis points to 2.59%.
– Britain’s 10-year yield rose three basis points to 4.84%.
### Commodities
– West Texas Intermediate crude increased 3.7% to $76.64 a barrel.
– Spot gold edged up 0.9% to $2,691.16 an ounce.
This overview is brought to you with support from Bloomberg Automation and contributions from Natalia Kniazhevich and Julien Ponthus.
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