(Bloomberg) — Stocks took a hit and bond yields rose along with the dollar, and traders reduced their bets on Federal Reserve rate cuts this year after a spectacular jobs report.
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Stocks erased their 2025 advance, and the S&P 500 fell about 1% to its lowest level since Nov. 5. A drop in Treasuries briefly pushed 30-year yields above 5%. The dollar rose against most of its major peers. Swaps are discounting about 30 basis points from the Fed’s total cuts this year, compared with nearly 40 the previous Friday. Oil rose, raising concerns about inflation, as the United States increased sanctions against Russia.
In December, the U.S. economy added the most jobs since March and the unemployment rate unexpectedly fell, capping a surprisingly strong year. Separate data fueled concerns about persistent price pressures, with consumers’ long-term inflation expectations rising to the highest level since 2008.
“Investors may want to prepare for more volatility as the market recalibrates expectations of fewer cuts,” said Gina Bolvin of Bolvin Wealth Management Group.
The S&P 500 fell 0.9%, briefly surpassing its 100-day moving average. The Nasdaq 100 sank 0.9%. The Dow Jones Industrial Average fell 1.1%. A gauge of the “Magnificent Seven” mega-caps fell 0.1%. The Russell 2000 index of small companies lost 2.1%. Wall Street’s favorite volatility indicator, the VIX, rose to around 20.
The 10-year Treasury yield rose seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.
Following Friday’s strong jobs data, economists at some big banks revised their forecasts for additional rate cuts by the Federal Reserve.
Bank of America Corp., which previously expected two quarter-point reductions this year, no longer expects any and said there is a risk that the next step will be an increase. Citigroup Inc. – whose rate cut outlook is among the most hopeful on Wall Street – still expects five quarter-point cuts, but says they will begin in May. Goldman Sachs Group Inc. sees two cuts this year instead of three.
“The Fed may be very comfortable staying put in January and will need some surprises or significant downward reversals in inflation in the upcoming jobs reports to wake it up from the rates slumber in March,” said Seema Shah of Principal Asset Management. “For global bonds, the strength of the US jobs report simply adds to their challenges. Peak performance has not yet been reached.”
Treasury yields have been rising since the Federal Reserve began its rate-cutting cycle in September. A resilient US economy further fueled the moves, leaving the 10-year yield more than 100 basis points higher than it was before the debut rate cut. All of that has forced bond investors to grapple with the possibility that the benchmark yield could soon return to 5%, a level that has been surpassed only a handful of times over the past decade.
The rise in Treasury yields over the past month has been largely driven by real rates, suggesting that higher growth expectations have been the dominant factor behind the sell-off, according to Gennadiy Goldberg of TD Securities. .
Neil Birrell, of Premier Miton Investors, says any hope of a quiet start to the year has now disappeared.
“Good news for the strength of the economy and bad news for those hoping for interest rate cuts, as inflation will remain high on the Fed’s agenda now,” he said. “It looks like the rise in bond yields will continue, which is bad news for stocks. Could the 5% 10-Year Treasury Yield Really Be Achievable?
For investors expecting stock markets to rally on mega-cap tech names, the latest data did them no favors, according to Lara Castleton of Janus Henderson Investors.
“People are now going to worry that the Fed won’t be able to make any cuts, the pressure is building on the Fed,” said Guy Stear of Amundi Investment Institute. “Yields will continue to rise toward 5% in the coming months, putting pressure on equity markets unless the first-quarter earnings season is very strong.”
For eToro’s Bret Kenwell, while the market may not like the latest jobs data, there are many things worse than a strong labor market.
“Without a solid foundation in the labor market, everything falls apart. Investors should keep that in mind, even if it means rate cut expectations take a step back,” Kenwell said.
In fact, it seems like we’re back in a world where good news is bad news, said Scott Helfstein of Global X. But that seems shortsighted, he noted.
“We think companies can meet lofty earnings expectations this year driven by automation technologies like artificial intelligence and deregulation, and that will drive stocks rather than the Fed,” he said.
The latest data raises the stakes for inflation indicators due out next week. Consumer price index data for December, due to be released on January 15, is forecast to show a third consecutive month of acceleration, at a rate of 2.9%.
“The surprisingly strong jobs report certainly won’t make the Federal Reserve any less aggressive,” said Ellen Zentner of Morgan Stanley Wealth Management. “All eyes will now be focused on next week’s inflation data, but even a downside surprise on those numbers probably won’t be enough to get the Fed to cut rates anytime soon.”
Corporate Highlights:
Tesla Inc. updated its best-selling Model Y, applying a design element from the polarizing Cybertruck to its high-volume sport utility vehicle.
Nvidia Corp. criticized new chip export restrictions expected to be announced soon, saying the White House was trying to undermine the incoming Trump administration by imposing last-minute rules.
Delta Air Lines Inc. earnings beat Wall Street estimates for the final months of 2024, driven by gains in both the U.S. and overseas markets. The company doesn’t expect momentum to slow in the new year.
Walgreens Boots Alliance Inc. reported quarterly sales that beat Wall Street expectations, boosting shares and easing pressure on the drugstore chain as it mulls 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. scrapped plans to create a joint sports streaming service just days after settling a lawsuit filed against the three companies alleging the platform would crush competition.
Chip design company Synopsys Inc. has won conditional approval from the European Union’s merger watchdog for its planned $34 billion purchase of software developer Ansys Inc, after addressing the regulator’s fears about the deal.
Some of the main movements in the markets:
Stocks
The S&P 500 fell 0.9% at 1:59 p.m. New York time
The Nasdaq 100 fell 0.9%
The Dow Jones Industrial Average fell 1.1%
The MSCI World index fell 1%
Bloomberg Magnificent 7 Total Return Index fell 0.1%
The Russell 2000 index fell 2.1%
Coins
The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.6% to $1.0241
The pound fell 0.8% to $1.2213.
The Japanese yen rose 0.2% to 157.90 per dollar
Cryptocurrencies
Bitcoin rose 3% to $94,856.67
Ether rose 2.5% to $3,288.01.
Captivity
The 10-year Treasury yield rose seven basis points to 4.76%
The yield on the 10-year German bond rose three basis points to 2.59%
The British 10-year yield rose three basis points to 4.84%
Raw materials
West Texas Intermediate crude rose 3.5% to $76.48 a barrel
Spot gold rose 0.8% to $2,687.39 an ounce.
This story was produced with the help of Bloomberg Automation.
–With the help of Natalia Kniazhevich and Julien Ponthus.
