Stocks hit as jobs fuel bets Fed will remain on hold: Market Rep

(Bloomberg) — Stocks suffered and bond yields climbed along with the dollar, after traders trimmed their bets on a Federal Reserve rate cut this year after the jobs report.

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Equities erased their 2025 advance, with the S&P 500 falling nearly 1% to its lowest level since Nov. 5. The greenback rose against most of its major counterparts. Swaps are pricing in about 30 basis points of total Fed cuts this year, compared with about 40 on Friday. Oil rose – fueling worries about inflation – as the US increased sanctions against Russia.

In December the US economy added the most jobs since March and the unemployment rate fell sharply, capping a surprisingly strong year. Separate data fueled concerns about stubborn price pressures, with consumers’ long-term inflation expectations hitting their highest level since 2008.

“Investors may want to brace themselves for more volatility as the market realigns expectations for lower cuts,” said Gina Bolwin at Bolwin Wealth Management Group.

The S&P 500 fell 0.9%, briefly breaching its 100-day moving average. The Nasdaq 100 sank 0.9%. The Dow Jones industrial average fell 1.1%. A gauge of “magnificent seven” megacaps fell 0.1%. The Russell 2000 index of small firms lost 2.1%. Wall Street’s favorite volatility gauge — the VIX — rose to nearly 20.

The yield on the 10-year Treasury rose seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.

After Friday’s solid jobs data, 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, now expects none, and said the next move risks an increase. Citigroup Inc. — whose rate-cut outlook is one of Wall Street’s highest expectations — still sees five quarter-point cuts, but says they will start in May. Goldman Sachs Group Inc. This year sees two cuts compared to three.

“The Fed may be too comfortable to stay in January and it will take some meaningful bearish inflation surprise or reversal in the upcoming jobs reports to wake them from their rate slumber in March,” said Seema Shah at Principal Asset Management. Seema Shah said. “For global bonds, the strength of the US jobs report adds to their challenges. The peak of yield has not yet been reached. “

Treasury yields have been rising since the Fed began its rate-cutting cycle in September. A resilient U.S. economy further fueled the move, leaving the 10-year yield more than 100 basis points higher than before the debut rate cut. All that has forced bond investors to grapple with the prospect that the benchmark yield could soon return to 5% — a level that has been breached only a handful of times in the past decade.

According to Gennady Goldberg at TD Securities, the move higher in Treasury yields over the past month has been driven by real rates – suggesting that higher growth expectations have been the main driver behind the sell-off.

Any hopes of a quiet start to the year have now well and truly disappeared, says Neil Birrell at Premier Mitton Investors.

“Good news for the strengthening economy and bad news for those expecting interest rate cuts, as inflation will now be at the top of the Fed’s agenda,” he noted. “The jump in bond yields looks set to continue, which is bad news for equities. Can a 5% yield on the 10-year Treasury really be a hit?”

According to Lara Castleton at Janus Henderson Investors, for investors hoping that the equity markets would expand from megacap tech names, the latest data did them no favors.

“People are now going to be worried that the Fed won’t cut at all, putting pressure on the Fed,” said Guy Steer of the Amundi Investment Institute. “Yields will continue to rise 5% over the next two months, putting pressure on equity markets until you get a very strong first quarter earnings season.”

For Brett Kenwell at eToro, while the market may not like the latest jobs data, there are a lot worse things than a strong labor market.

“Without a strong foundation in the labor market, the whole thing falls apart. Investors need to take this into account – even if it means rate-cut expectations take a step back,” Kenwell said.

In fact, it looks like we’ve returned to a world where good news is bad news, said Scott Helfstein at Global X. But that seems short-sighted, he noted.

“We believe companies can meet higher earnings expectations this year driven by automation technologies like AI and deregulation, and that will drive equities rather than the Fed,” he said.

The latest data raises the stakes for inflation measures to be released next week. December Consumer Price Index data 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 is certainly not going to make the Fed any less dovish,” said Ellen Zantner at Morgan Stanley Wealth Management. “All eyes will now turn to next week’s inflation data, but those A downside surprise in the numbers is also possible that the Fed won’t have enough to cut rates anytime soon.”

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