(Bloomberg) — Stocks were hammered and bond yields climbed alongside the dollar as traders reduced bets on a Federal Reserve interest rate cut after a bombshell jobs report.
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A 1.5% drop in the S&P 500 on Friday wiped out its gains in the fledgling year. The gauge suffered its worst rout since Dec. 18, when the Fed shook markets by signaling caution about how quickly it can continue cutting rates. Wall Street’s riskiest sectors sold off, with small caps down about 10% from previous highs. A decline in Treasuries briefly pushed 30-year yields above 5%. Swaps now price in less than 30 basis points of Fed cuts this year.
The U.S. economy recorded the most job gains since March in December and the unemployment rate fell unexpectedly, capping a surprisingly strong year. Separate data fueled concerns about stubborn price pressures, with consumers’ long-term inflation expectations rising to their highest level since 2008. And a rise in oil prices only added to the anxiety on this front.
Neil Birrell of Premier Miton Investors says any hope of a quiet start to the year is now well and truly gone.
“Good news for the strength of the economy and bad news for those hoping for lower interest rates, as inflation will now remain at the top of the Fed’s agenda,” he noted . “The rise in bond yields looks set to continue, which is bad news for stocks. Could a 5% yield on 10-year Treasury bonds really be achieved?
At Interactive Brokers, Steve Sosnick says stock traders have once again revealed their “addiction to liquidity.”
“Equity traders are once again more concerned about the potential for monetary easing than the kind of robust economy that can improve business fundamentals,” he added.
The S&P 500 briefly rose above its 100-day moving average. The Nasdaq 100 fell 1.6%. The Dow Jones Industrial Average fell 1.6%. A gauge of the “Magnificent Seven” megacaps fell 1.2%. The Russell 2000 index of small companies lost 2.2%. Wall Street’s favorite volatility gauge, the VIX, surged to around 20.
The yield on the 10-year Treasury note rose seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.
Following strong jobs data released Friday, economists at some major banks revised their forecasts for additional Fed rate cuts.
Bank of America Corp., which previously expected two quarter-point cuts this year, is not expecting any more and said there is a risk the next move will be a hike. Citigroup Inc. — whose outlook for rate cuts is among the most optimistic on Wall Street — is still considering five-quarter-point cuts, but says they will begin in May. Goldman Sachs Group Inc. plans two cuts this year compared to three.
“Investors may want to prepare for more volatility as the market recalibrates its expectations toward fewer cuts,” said Gina Bolvin of Bolvin Wealth Management Group.
Treasury yields have risen since the Fed began its rate-cutting cycle in September. The resilience of the US economy further fueled these moves, leaving the 10-year yield more than 100 basis points higher than it was before the first rate cut. All of this has forced bond investors to confront the possibility that the benchmark yield could soon return to 5%, a level that has only been exceeded a few times in the past decade.
The rise in Treasury yields over the past month has largely been driven by real rates, suggesting that higher growth expectations were the main driver of the selling, according to Gennadiy Goldberg of TD Securities.
“For global bonds, the strength of the U.S. jobs report only adds to the challenges,” said Seema Shah of Principal Asset Management. “The peak yields have not yet been reached.”
“People will now be worried that the Fed won’t be able to cut interest rates at all, pressure is mounting on the Fed,” said Guy Stear of the Amundi Investment Institute. “Yields will continue to rise by up to 5% over the next few months, which will put pressure on the stock markets unless you have a very strong first quarter earnings season.”
Even though the stock market doesn’t need to cut rates to rise, a Fed that eases policy is still a better environment for stock investors than one that tightens policy — or leaves it unchanged, Chris said Zaccarelli of Northlight Asset Management. .
“At this point in the cycle, earnings will need to improve – and not just at big tech companies – for markets to ‘reach’ their already high valuations. We would therefore be cautious in the short term,” he noted. .
For investors who were hoping that stock markets would expand from large-cap tech names, the latest data hasn’t done them any favors, according to Lara Castleton of Janus Henderson Investors.
For eToro’s Bret Kenwell, even if the market doesn’t like the latest jobs data, there are many things worse than a strong job market.
“Without a solid foundation in the labor market, everything collapses. Investors should keep this in mind, even if it means rate cut expectations take a backseat,” Kenwell said.
Indeed, it seems we’re back in a world where good news is bad news, said Global X’s Scott Helfstein. But that seems shortsighted, he noted.
“We believe companies can meet high earnings expectations this year with automation technologies like AI and deregulation, and that will drive stocks rather than the Fed,” he said.
Earnings season kicks off in full swing next week with financial sector reports. Banks such as JPMorgan Chase & Co. and Wells Fargo & Co. are expected to post continued gains in trading and investment banking businesses, which helped offset declines in net interest income caused by the increasing deposits and weak demand for loans.
Also next week, consumer and wholesale price reports will offer more clues about the direction inflation is heading ahead of the Fed’s next policy meeting on Jan. 28-29.
“The surprisingly strong jobs report is certainly not going to make the Fed less hawkish,” said Ellen Zentner of Morgan Stanley Wealth Management. “All eyes will now be on next week’s inflation data, but even a downward surprise in these numbers likely won’t be enough to prompt the Fed to cut rates in the near future.”
Company strengths:
Tesla Inc. has refreshed its best-selling Model Y, applying a design element from the polarizing Cybertruck to its high-volume sport utility vehicle.
Hewlett Packard Enterprise Co. has won a contract worth more than $1 billion to provide Elon Musk’s Social Network X with servers optimized for artificial intelligence work.
Nvidia Corp. criticized new chip export restrictions expected to be announced soon, saying the White House was trying to undermine the new Trump administration by imposing last-minute rules.
Delta Air Lines Inc.’s profit topped Wall Street estimates for the final months of 2024, buoyed by gains both in the U.S. market and abroad. The company does not expect this momentum to slow down in the new year.
Walgreens Boots Alliance Inc. reported quarterly sales that beat Wall Street expectations, boosting stocks and easing pressure on the drugstore chain as it considers strategic options, including a sale.
Constellation Energy Corp. agreed to acquire Calpine Corp. for $16.4 billion in a deal that will create the largest fleet of power plants in the United States.
Walt Disney Co., Fox Corp. and Warner Bros. Discovery Inc. have abandoned plans to create a joint sports streaming service, saying they instead want to focus on their existing online offerings.
Chip design company Synopsys Inc. has won conditional approval from the European Union’s merger watchdog for its proposed $34 billion takeover of software developer Ansys Inc., after responding to regulator’s fears about the deal.
Some of the main market movements:
Actions
The S&P 500 fell 1.5% as of 4 p.m. New York time
The Nasdaq 100 fell 1.6%
The Dow Jones Industrial Average fell 1.6%
The MSCI World index fell 1.5%
The Bloomberg Magnificent 7 Total Return Index fell 1.2%
The Russell 2000 index fell 2.2%
Currencies
The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.5% to $1.0245
The British pound fell 0.8% to $1.2210
The Japanese yen rose 0.3% to 157.72 per dollar
Cryptocurrencies
Bitcoin rose 2.8% to $94,655.51
Ether rose 1.7% to $3,261.71
Bonds
The 10-year Treasury yield rose seven basis points to 4.76%
The German 10-year yield rose three basis points to 2.59%
The UK 10-year yield rose three basis points to 4.84%
Raw materials
West Texas Intermediate crude rose 3.7% to $76.64 a barrel
Spot gold rose 0.9% to $2,691.16 an ounce
This story was produced with the help of Bloomberg Automation.
–With the help of Natalia Kniazhevich and Julien Ponthus.
