Title: Stock Market Dips as Bond Yields Surge
The December jobs report significantly altered anticipations of another Federal Reserve rate cut in January. Job growth surged, surpassing expectations, erasing any vestiges of a rate decrease. The economy commenced 2025 with a solid stride, with the Atlanta Fed expecting 2.7% GDP growth during the final quarter.
Employment expanded by 256,000 nonfarm jobs, beyond expectations. Previous figures were slightly adjusted downward, but the powerful report remained impressive. Household survey data dazzled, recording a 478,000 job increase, while the research series, aligned with payroll report criteria, boosted by 102,000.
Wage growth marginally fell short of expectations at 3.9% year-over-year, from 4.0% the previous month. Meanwhile, the average workweek remained steady at 34.3 hours, surpassing the 2024 low of 34.2 in January, July, and October.
High-frequency unemployment data corroborated the improving employment landscape. Initial claims for benefits neared 2024's lowest levels, while continuing claims maintained a slight elevation, implying a modest slowdown in the rate of rehiring compared to early 2024.
Unemployment rate slipped to 4.1%, from 4.2%, terminating its proximity to the Sahm Rule's recession-forecasting threshold. Despite holding an unblemished record of predicting recessions, the Sahm Rule may be overstating risks during the current economic cycle.
Monitoring prime-aged employment statistics (25 to 54-year-olds) can help determine when unemployment concerns warrant attention. While the recent decline showcases some softness, it has not posed an immediate threat to the economy's health and registered an improvement in December.
The 10-year U.S. Treasury yield climbed to a 52-week high of 4.76%, following the resilient employment report. Real, after-inflation expectations lagged behind, with a 10-year yield of 2.29%, surpassing the average from the 1999-2008 period and far exceeding post-global financial crisis levels.
Stocks experienced a downturn and countered their year-to-date gains due to escalating bond yields and expectations of fewer rate cuts. Tech giants such as Microsoft, Meta Platforms, Amazon, Apple, NVIDIA, Alphabet, and Tesla followed suit.
Economically sensitive stocks, including cyclical stocks and small-capitalization stocks, outperformed defensives. The ratio remains elevated, signifying investors' low expectation for recession risks in stocks. Developments in banks displayed some weakness, potentially foreshadowing emerging fissures.
Investor attention will shift to Wednesday's consumer inflation report. Consensus anticipates December CPI to rise to 2.9% year-over-year, from 2.7%, bolstering hopes of a more restrictive Fed monetary policy.
Market pricing revealed that rate cut expectations for 2025 have fallen from two to just a single 25-basis-point cut. No further cut expectations have emerged until at least mid-year.
Although the robust jobs report appears positive, stocks and bond yields exhibited opposite reactions. Stocks often favor lower rates from the Fed, while escalating bond yields pose potential challenges to valuations. If economic growth and corporate earnings prove robust, stocks may be able to withstand yield increases over time.
In conclusion, brisk December job growth revised the projections of Federal Reserve rate cuts in 2025, raising uncertainty. Predictions of no rate cuts, or minimally significant reductions, have inflated, fueled by concerns over inflation and economic indicators.
- The robust December jobs report significantly reduced the likelihood of another federal reserve rate cut in 2025, as the economy showed signs of strength.
- Despite the strong jobs report, the Federal Reserve may still consider rate cuts due to rising inflation, as indicated by the Consumer Price Index (CPI).
- The stocks decline and the bear market in 2025 were largely due to the expectation of fewer rate cuts by the Federal Reserve and the resulting increase in bond yields.
- Bond yields, which hit a 52-week high in 2025, declined after the release of disappointing CPI data, which may prompt the Federal Reserve to consider rate cuts.
- If the economy continues to grow and corporate earnings remain strong, stocks may be able to withstand the potential challenges posed by rising bond yields, even in the face of fewer rate cuts.
