Mike Dolan’s view of the day ahead in US and global markets
After a tumultuous start to the year for US Treasuries and global sovereign bonds in general, Friday tested the ‘hot economy’ thesis by revealing just how tight US labor markets still are as a new administration takes office in Washington this month.
Friday’s US jobs report for December ties together a series of labor market news this week – with a somewhat mixed picture so far.
The weekly unemployment numbers released on Wednesday were remarkable, as they showed the lowest jobless claims in eight months. The number of job openings in November also increased. But wage growth in the private sector fell short of forecasts, with data released on Thursday showing a slowdown in hiring and firing last month.
With the national payrolls report potentially deciding all of the above, consensus expectations are for job growth to soften overall in December to some 160,000 – with the unemployment rate steady at 4.2%.
If this succeeds, the Federal Reserve will likely be seen as justified in its future stance of further cautious rate cuts. Policymakers have indicated just two more quarter-point cuts for this year, although prices in futures markets are marginally lower than that – some 41 basis points since Friday and the first 25bp as recently as June.
On Thursday, the Fed’s final speakers were sharply slanted.
Kansas City Federal Reserve President Jeff Schmid has signaled reluctance to cut interest rates again. “I believe we are close to a point where the economy needs neither restrictions nor support and that policy should be neutral,” Schmid said.
Fed Governor and noted hawk Michelle Bowman said she supported last month’s rate cut as the “final step” in the central bank’s recalibration of monetary policy.
With markets closed Thursday for former President Jimmy Carter’s funeral acting as a sort of fire break in an anxious first full week of trading of the year, long-dated Treasury yields remain elevated ahead of the payrolls report.
At 4.94%, the yield on the 30-year ‘long bond’ is still lurking 5% for the first time since October 2023, while benchmark 10-year yields of 4.70% remain close to this week’s 8-year highs months.
Fueled in part by some extreme cold spells across the Northern Hemisphere, oil prices continued to deteriorate, with US crude reaching its highest level since October.
The dollar index also remains pumped near a two-year peak set last week.
With Wall Street closed on Thursday, futures there are slightly in the red ahead of Friday’s reopening.
Of course, the payrolls report addresses just one of the bond market’s concerns, with anxiety and uncertainty surrounding the extent of President-elect Donald Trump’s planned tax cuts, tariff hikes and immigration restrictions.
But to the extent that some or all of those policy promises are inflationary — in an already sticky inflation environment — the jobs report sets the tone ahead of Trump’s Jan. 20 inauguration.
As for the stock market, the focus on bonds could shift somewhat as the fourth-quarter earnings season gets under way — S&P 500 companies are expected to post a combined 10% profit growth last year, and analysts forecast a further 14% gain in 2025.
Delta Airlines, Walgreens Boots Alliance and Constellation Brands kick off the reporting season on Friday – with the big banks following next week.
There was good news for tech companies out of Taiwan, with the world’s largest contract chipmaker TSMC reporting fourth-quarter revenue that easily beat forecasts as it benefited from demand for artificial intelligence.
Abroad, bond markets also rocked the world this week – with Britain’s sovereign bond market in the crosshairs as 30-year gilt yields hit 27-year highs there and 10-year benchmarks hit levels not seen since 2008.
While these rises in gilt yields are largely in line with what has happened in US Treasuries, a worrying development in the UK is that the pound has also lagged and stopped tracking domestic yields.
Gilts remained on the edge early on Friday, but yields remained below weekly highs and the pound recovered somewhat from Thursday’s 14-month low against the dollar.
Shares in Asia were under pressure, with major Chinese and Japanese indexes down more than 1% each.
Inflation data from China on Thursday showed the country is still grappling with pervasive deflationary pressures.
China’s central bank is expected to deploy its most aggressive monetary tactics in a decade this year as it tries to stimulate the economy and soften the blow of impending US tariff hikes – but risks exhausting its firepower in doing so.
The People’s Bank of China’s announcement on Friday that it had suspended purchases of government bonds due to a lack of assets highlighted the limits on its resources as it faces an increasingly challenging economic environment.
Key events that should give more direction to US markets later on Friday:
* December US employment report, University of Michigan January consumer sentiment survey, December Canadian employment report
