Week in Review: January 10, 2025

January 13, 2025

Recap & Commentary

Markets ended the week lower, impacted by the good-news-is-bad scenario of unexpectedly strong jobs data which simultaneously increased concerns about the timing and number of Fed rate cuts in 2025 and drove interest rates higher.

The combination of the week’s employment data, along with recent inflation data, ongoing concerns about deficit spending, generally solid economic growth, and expectations of increased tariffs under the incoming Trump administration drove interest rates higher across the yield curve. At the short end, the 2-Year Treasury yield ended the week at 4.28%, its highest level since July, while the 10-Year Treasury yield ended the week at 4.77% its highest level in 15 months. The move higher ignited talk of the 10-Year yield exceeding 5.0% in the weeks/months ahead, something that hasn’t consistently occurred since 2007.

In the aftermath of the jobs data, some economist suggested the Fed may be done cutting rates for the time being and that the timing and amount of any future rates cuts will once again likely be determined by progress, or lack thereof, on lowering inflation. Other economists went so far as to say that depending on how inflation and economic data unfold in 2025, the Fed’s next move might be a rate hike, not a cut. While that does not represent broader market expectations, which ended the week pricing in just one rate cut in 2025, it marks a stark shift from as recently as early December when market were pricing in three cuts in 2025 and there was no talk of a rate hike.

Economic Commentary

Nonfarm payrolls added 256K jobs in December, the strongest pace of growth since March, easily surpassing the consensus forecast of 164K. Unemployment declined 0.1% to 4.1% leaving it range bound between 4.1% and 4.2%, where it has been since June. The labor force participation rate remained unchanged at 62.5%, while average hourly wages increased 3.9% from a year ago. The report corroborated remarks by Fed Chair Jay Powell following the Fed’s December meeting that the slowdown in labor market conditions is happening in a “gradual and orderly way” as opposed to a way that “really raises concerns.”

Other employment related data released during the week showed job openings increased ~250k in November to 8.1M, the first reading above 8M since May, while weekly initial jobless claims fell 10 to 201K, an 11-month low. Combined with the December employment report, the data suggested the Fed does not need to consider additional cuts for now to support what had appeared in late summer and early fall, to be a faltering jobs market.

Service sector activity expanded for a sixth consecutive month in December, supported by modest growth in employment and new orders. Perhaps most noteworthy was the prices paid index which jumped to a 22-month high, fanning concerns about inflation.

Consumer sentiment fell slightly in December, however, most notable was the 5-year inflation expectation that jumped 0.3% to 3.3%, its highest level since 2008, while the 1-year inflation expectation jumped 0.5% to 3.3%, its highest level since May.

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Of Note

Oil prices rose to a three-month high after the US imposed a new round of sanctions on Russia, that included several large Russian energy companies, more than a dozen officials and energy executives, and 180 tanker vessels.

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Market Indices   (As of 01/10/2025)

• Consumer Inflation (CPI)
• Producer Inflation (PPI)
• Retail Sales
• Housing Starts
• Industrial Production
• Initial Jobless Claims