• Savings Directions
• November 14, 2024

Stocks and Bonds Fall Together in the U.S.

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In a tumultuous beginning to the year for the U.Sstock market, a robust non-farm employment report delivered an unexpectedly heavy blow to investor confidenceAs of January 10, 2024, the major stock indices faced significant declines, with the Dow Jones Industrial Average falling by 1.63% to close at 41,938.45 pointsThe Nasdaq similarly dropped by 1.63%, ending at 19,161.63 points, while the S&P 500 showed a decrease of 1.54%, closing at 5,827.04 pointsThis rough start has wiped out the year-to-date gains for these indices, as the Dow has registered a loss of 1.42% since the year's opening, the S&P 500 is down by 0.93%, and the Nasdaq has seen a decline of 0.77%.

Compounding this situation was a sharp sell-off in the Treasury bond market that resulted in soaring yieldsThe 10-year U.STreasury yield, often referred to as the anchor for global asset pricing, approached 4.8%, marking the highest level since November 1, 2023. Meanwhile, the yield on the 30-year Treasury bond even surpassed the 5% threshold, reflecting market adjustments to rising expectations of a neutral interest rate.

As a consequence of these dynamics, expectations regarding any potential interest rate cuts by the Federal Reserve have dramatically diminished

Following the report, predictions for rate cuts in 2025 plummeted, with forecasts dropping from a prior estimate of 42.5 basis points to just 27.5 basis pointsThis adjustment implies that market participants now largely anticipate just a single rate cut during the scheduled Fed meeting in July.

A critical development to note is the growing probability that the Federal Reserve may not lower interest rates at all throughout the yearThe nuanced signals emerging as the New Year commenced suggest a fundamental reassessment of monetary policy, contributing to the current market volatility.

According to the January 10 data from the U.SBureau of Labor Statistics, non-farm payroll employment in December 2023 surged by 256,000 jobs, marking the largest increase in nine months and far exceeding economists' forecasts of only 160,000 new positionsAdditionally, the unemployment rate unexpectedly fell to 4.1%, lower than the anticipated rate of 4.2%. Average hourly earnings saw a monthly increase of 0.3%, aligning with expectations.

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economy added a total of 2.2 million jobs, averaging around 186,000 new jobs per month, a decline from the 3 million jobs created in 2022 but still above the pre-pandemic levels of 2 million jobs in 2019.

The surprising strength in the December employment numbers can be attributed to a renewed sense of corporate optimism or "animal spirits," as businesses adjust to an improving overall business environmentNumerous surveys, including the Fed’s Beige Book and various Purchasing Managers Index (PMI) reports, have highlighted a notable boost in corporate sentiment, despite the prevailing high-interest rate scenarioThis underscores a change in expectations among companies.

However, strong employment figures often signal accelerated economic growth and may intensify inflationary pressuresThis scenario places the Fed in a precarious position where they must balance between fostering growth and curtailing inflation, a task that demands heightened caution.

A pressing question remains: Can the robust performance of the U.S

labor market persist? The reality of the administration's new policies will significantly influence the economic landscapeMoves to introduce tariffs and expel undocumented immigrants are among the first initiatives slated for roll-outYet, due to the negotiation period regarding tariffs, the economic and inflationary impacts will likely emerge graduallyIn contrast, immigration policies could yield immediate effects—particularly because undocumented immigrants contribute both to the workforce and consumer baseA reduction in this labor supply could disrupt the market, potentially dampening overall demand and putting downward pressure on job growth trends and inflation effects.

As the non-farm employment report released, inflationary pressures began to resurgeData from the University of Michigan revealed that consumer expectations for inflation over the next 5 to 10 years rose to 3.3%, the highest level since 2008, significantly exceeding pre-release expectations of 3.0%. Such shifts have cooled the market's inclination toward expecting rate cuts from the Fed.

Goldman Sachs has since recalibrated its outlook, now predicting rate cuts during June and December of this year, with another anticipated cut in June 2026, leading to a terminal interest rate range of 3.5% to 3.75%. Earlier projections indicated three rate cuts spread across March, June, and September of the current year.

Economic analysts have begun to emphasize how the dual impact of resilience in the labor market alongside rising inflationary pressures might lead the Fed to abandon its previous dovish sentiment

Aditya Bhave, an economist with Bank of America, stated that the robust job report fundamentally ends any hope for rate cuts in the near termHe argued that if the core PCE price index's annual growth surpasses 3% and inflation expectations continue to increase, discussions surrounding rate hikes would arise rather than cuts.

Market observances, such as those from CME Group’s FedWatch Tool, reveal that the probability of the Fed not implementing any rate cuts this year surged from 13% to 25% following the report, with the likelihood of just a single cut now exceeding 60%.

Jack McIntyre, a portfolio manager at Brandywine Global, echoed these sentiments, suggesting that the employment report has significantly dimmed prospects for any further rate cuts in the first half of 2025. If the Fed remains on hold for an extended period, there would be increased likelihood for subsequent rate hikes down the line.

Aligning with this perspective, Peter Cardillo, Chief Market Economist at Spartan Capital Securities, noted the employment report carries positive news for the economy yet poses challenges for the Fed

Should the labor landscape continue on this robust path alongside imposed tariffs, it may signal the end of the easing cycle we have witnessed.

Conversely, some economists continue to hold onto the belief that the Fed may still enact rate cutsBrian Jacobsen, Chief Economist at Annex Wealth Management, noted that while market reactions to the labor report might suggest the Fed should refrain from further cuts, the details reveal that job growth is concentrated within non-cyclical sectors, and wage growth has not significantly exacerbated inflationary pressuresHe suggested that the Fed might have the latitude to wait before making any adjustments to interest rates.

Looking forward, the potential for a downward trend in U.Sjob data remains as the looming debt ceiling issue must also be addressedThe Republican hold on Congress appears precarious, which could hinder the enactment of tax cuts in the immediate term