(Bloomberg) — Stocks fell and bond yields rose along with the dollar, as traders trimmed their bets on a Federal Reserve rate cut after a report on job growth.
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The S&P 500’s 1.5% drop on Friday reversed its gains in the new year. The gauge posted its worst drop since Dec. 18 — when the Fed roiled markets by signaling caution about how quickly it could continue to cut rates. Riskier corners of Wall Street sold off, with the smaller market cap down about 10% from previous highs. The decline in government bonds briefly lifted 30-year yields above 5%. The price of swaps is now less than 30 basis points of Fed tapering this year.
The US economy added the most jobs in December since March, and the unemployment rate unexpectedly fell, 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 the oil surge only added to anxiety on that front.
Premier Miton Investors’ Neil Birrell says any hope of a quiet start to the year has now all but disappeared.
“Good news for the strength of the economy and bad news for rate cut hopefuls, as inflation will now remain at the top of the Fed’s agenda,” he noted. “The jump in bond yields looks set to continue, which is bad news for stocks. Can a 5% yield on 10-year bonds really be achieved?”
At Interactive Brokers, Steve Sosnick says stock traders have once again discovered their “addiction to liquidity.”
“Stock traders are once again more concerned about the potential for monetary adjustment than the kind of strong economy that can improve corporate fundamentals,” he added.
The S&P 500 briefly broke through its 100-day moving average. The Nasdaq 100 sank 1.6 percent. The Dow Jones Industrial Average fell 1.6%. The “Seven Magnificent” megacap gauge fell 1.2%. The Russell 2000 index of small companies lost 2.2 percent. Wall Street’s favorite gauge of volatility – the VIX – jumped to around 20.
The yield on the 10-year Treasury bond rose seven basis points to 4.76%. Bloomberg’s dollar spot index rose 0.5%.
After Friday’s solid jobs data, economists at some major banks revised their forecasts for more Fed rate cuts.
Bank of America Corp., which previously expected two cuts by a quarter of a point this year, no longer expects them and said there was a risk the next move would be an increase. Citigroup Inc. — whose rate cut prospects are among the most promising on Wall Street — still expects five cuts of a quarter-point, but says they will start in May. Goldman Sachs Group Inc. recording two reductions this year compared to three.
“Investors may want to brace for more volatility as the market recalibrates expectations for smaller cuts,” said Gina Bolvin of Bolvin Wealth Management Group.
Treasury yields have been rising since the Fed 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 this has left bond investors grappling with the possibility that the benchmark yield could soon return to 5% — a level that has been breached only a few times in the past decade.
The rise in Treasury yields over the past month was largely driven by real rates — suggesting that higher growth expectations were the dominant driver of the selloff, according to Gennady Goldberg of TD Securities.
“For global bonds, the strength of the US jobs report only adds to their challenges,” said Seema Shah at Principal Asset Management. “The peak yield has not yet been reached.”
“People will now become worried that the Fed won’t be able to cut at all, the pressure is building on the Fed,” said Guy Stear of the investment institute Amundi. “Yields will continue to rise toward 5% over the next few months, putting pressure on equity markets unless you get a very strong earnings season in the first quarter.”
While the stock market doesn’t need lower rates to rally, an easing Fed is always a better environment for equity investors than one that tightens — or leaves policy unchanged, said Chris Zaccarelli of Northlight Asset Management.
“At this point in the cycle, earnings will need to improve – and not just within the big tech companies – for the markets to ‘grow’ to their already high valuations, so we would be cautious in the short term,” he noted. .
For investors hoping for a stock market rally from megacap tech names, the latest data did them no favors, according to Lara Castleton of Janus Henderson Investors.
For eToro’s Bret Kenwell, while the market may not like the latest jobs data, there are a lot worse things than a strong job market.
“Without a strong foundation in the labor market, the whole thing falls apart. Investors need to keep that in mind – even if it means rate cut expectations will take a step back,” Kenwell said.
Indeed, we seem to have returned to a world where good news is bad news, said Global X’s Scott Helfstein. But that seems short-sighted, he noted.
“We believe companies can meet high earnings expectations this year thanks to automation technologies like artificial intelligence and deregulation, and that will drive stocks, not the Fed,” he said.
Earnings season kicks into full swing next week with reports from the financial sector. Banks, including JPMorgan Chase & Co., are expected to and Wells Fargo & Co., showed continued gains in trading and investment banking, which helped offset a decline in net interest income caused by higher deposits and weak loan demand.
Also next week, consumer and wholesale price reports will offer more clues about the direction of inflation ahead of the Fed’s next policy meeting on January 28-29.
“A surprisingly strong jobs report certainly won’t make the Fed any less hawkish,” said Ellen Zentner of Morgan Stanley Wealth Management. “All eyes will now turn to next week’s inflation data, but even a surprise in those numbers is unlikely to be enough for the Fed to cut rates anytime soon.”
Corporate features:
Tesla Inc. has refreshed its best-selling Model Y, applying design elements from the polarizing Cybertruck to its massive SUV.
Hewlett Packard Enterprise Co. has won a deal worth more than a billion dollars to supply Elon Musk’s social network X with servers optimized to work with artificial intelligence.
Nvidia Corp. has criticized new chip export restrictions expected to be announced soon, saying the White House is trying to undermine the incoming Trump administration by imposing the rules at the last minute.
Delta Air Lines Inc. Profit beat Wall Street estimates for the final months of 2024, boosted by gains in the US and overseas markets. The company does not 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 buy Calpine Corp. for $16.4 billion in a deal that will create the largest fleet of US power plants.
Walt Disney Co., Fox Corp. and Warner Bros. Discovery Inc. have dropped plans to create a joint sports streaming service, saying they want to focus on their existing online offering instead.
Chip design company Synopsys Inc. has received conditional approval from the European Union’s watchdog for a planned $34 billion buyout of software developer Ansys Inc, after addressing regulators’ fears about the deal.
Some of the main moves in the markets:
Shares
The S&P 500 was down 1.5% as of 4 p.m. New York time
The Nasdaq 100 fell 1.6 percent
Dow Jones Industrial Average fell 1.6%
The world index MSCI fell 1.5 percent
Bloomberg Magnificent 7 Total Return Index fell 1.2%
The Russell 2000 index fell 2.2 percent
Currencies
Bloomberg’s dollar spot index rose 0.5%
The euro fell 0.5 percent 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 yield on 10-year Treasury bonds rose seven basis points to 4.76%
Germany’s 10-year yield rose three basis points to 2.59%
Britain’s 10-year yield rose three basis points to 4.84%
Goods
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.
