A hotter-than-expected December business report has been sent out Dow Jones Industrial Average fell more than 600 points (1.5%) on Friday morning as US Treasury yields continued to rise and inflation concerns took center stage. Most sectors have struggled, including finance.
Shares of Wells Fargo (NYSE: WFC) were trading 2.6% lower as of 11:46 a.m. ET, while the investment bank Jefferies Financial (NYSE: JEF) fell by 11.4% and the private equity giant Blackstone (NYSE: BX) it fell by approximately 5%.
Since mid-December, investors have been increasingly worried about sticky inflation, an issue that is also a major concern of the Federal Reserve. The Fed cut its forecast for 2025 rate cuts from four to two. The market is even more pessimistic about the outlook for a rate cut, and Friday’s jobs report didn’t help. Nonfarm payrolls added 256,000 jobs in December, 100,000 more than the Dow Jones consensus, and up from 212,000 in November. If that jobs report was positive, it would be that hourly wages rose 0.3% from the previous month, in line with expectations. Hourly wages rose 3.9% year over year, slightly below estimates.
Traders betting on how the Fed will handle the federal funds rate now see virtually no chance of a rate cut in January, with 75% of traders thinking the Fed will leave rates unchanged in March. About 40% of retailers expect only one rate cut in 2025.
“Surprisingly strong jobs report certainly won’t make Fed less hawkish,” Morgan Stanley Chief Economic Strategist Ellen Zentner told CNBC. “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.”
There was not much news related to individual companies in the sector on Friday, but higher interest rates may have several consequences for banks and financial institutions. Prominent among them are increasing deposit costs and renewing credit concerns, especially for commercial real estate loans. Blackstone has many real estate investments, and their borrowing costs rise when rates are higher, which could affect valuations. In addition, higher rates and higher volatility could spell trouble for investment banking activity, which investors in the sector hope will rebound this year.
Jefferies is a pure investment bank. On Wednesday, that reported earnings which are up 200% over the same period a year ago, driven by a rebound in dealmaking, so activity may still pick up this year. However, the high interest rate environment has hampered dealmaking and initial public offerings over the past few years. Longer persistence of higher rates could put a damper on that activity.
