The December jobs report showed US employers added 256,000 positions, far exceeding forecasts, with the unemployment rate falling further. The figures have solidified expectations that the Federal Reserve will maintain elevated interest rates to combat inflation, which remains above its 2% target. Markets are now bracing for prolonged monetary tightening and its ripple effects on equities and bond markets.
Labor Market Resilience Underpins Expectations for Higher Rates
December’s employment data has underscored the resilience of the US economy, with job creation outpacing predictions and unemployment hitting new lows. These developments have reinforced the belief that the Federal Reserve is unlikely to pivot to rate cuts in the near term, with analysts now projecting sustained high interest rates well into 2025.
According to Felipe Villarroel, portfolio manager of TwentyFour Asset Management, “this is definitely not an economy that is decelerating.” Many traders and economists expect more monetary tightening or at least a prolonged delay in rate reductions because inflation is still stubbornly high. Originally predicting a rate decrease in March, J.P. Morgan and Goldman Sachs have both changed their projections for the first rate drop, postponing it until June.
After the jobs statistics, the 10-year Treasury yield, which is a measure of long-term borrowing costs, hit 4.79%, the highest level since November 2023. A steeper yield curve, which indicates that markets are pricing in longer higher rates to combat economic overheating, is the outcome of shorter-term yields being steady.
Treasury Yields Challenge Equities and Risk Assets
As financial markets struggled with the effects of rising borrowing rates, the S&P 500 fell 1% last Friday, indicating that the spike in Treasury yields has put pressure on stocks. As bonds gain appeal due to their higher returns, rising yields typically reduce investor interest for stocks and other high-risk assets.
Concerns about a change in asset allocation, which would further depress equities markets, have increased in response to the possibility of 10-year yields rising beyond 5%. Prior to the jobs data, a BMO Capital Markets survey found that 69% of participants think the 10-year yield will break through this crucial level in 2025.
Adding to market tension, next week’s inflation data will be closely watched for indications of price pressures. Analysts warn that any unexpected uptick could further reinforce the Federal Reserve’s stance on maintaining restrictive monetary policy, prolonging challenges for both bonds and equities.
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