A look at the day ahead in U.S. and global markets.
After a torrid start to the year for U.S. Treasuries and global sovereign bonds at large, Friday tests the ‘hot economy’ thesis by revealing just how tight U.S. labor markets still are as a new administration takes office in Washington this month.
The release on Friday of the U.S. December employment report ties up a variety of jobs market updates this week – with something of a mixed picture so far.
The weekly jobless series released on Wednesday was a standout, as it indicated the lowest unemployment claims in eight months. November job openings also rose. However, private sector payroll growth missed forecasts, and on Thursday, investors saw data showing that both hiring and layoffs slowed last month.
With the national payrolls report potentially a decider on all the above, consensus expectations are for jobs growth to have softened overall in December to some 160,000 – with an unemployment rate steady at 4.2%.
If that pans out, the Federal Reserve will likely feel justified with a stance of further cautious rate cuts ahead. Its policymakers have indicated just two more quarter-point reductions for this year, even though futures markets price marginally less than that – some 41 basis points as of Friday and with the first 25bp not coming until June.
On Thursday, the latest Fed speakers tilted hawkish.
Kansas City Federal Reserve President Jeff Schmid signaled a reluctance to cut interest rates again. “I believe we are near the point where the economy needs neither restriction nor support, and that policy should be neutral,” Schmid said.
Fed governor and well-known hawk Michelle Bowman said she supported last month’s interest rate cut as the “final step” in the central bank’s monetary policy recalibration.
With Thursday’s market closures for former President Jimmy Carter’s funeral acting like a firebreak in an anxious first full trading week of the year, long-dated Treasury yields remain elevated ahead of the payrolls report.
At 4.94%, the 30-year ‘long bond’ yield is still stalking 5% for the first time since October 2023, while 10-year benchmark yields at 4.70% remain near this week’s 8-month highs.
Spurred in part by some extremely cold weather snaps across the Northern Hemisphere, oil prices remain an aggravator, and U.S. crude has hit its highest since October.
The dollar index also remains pumped up near the two-year high set last week.
With Wall Street stock markets closed on Thursday, futures there are slightly in the red ahead of Friday’s reopening.
Of course, the payroll report addresses just one of the bond market concerns, with anxiety and uncertainty about the extent of President-elect Donald Trump’s planned tax cuts, tariff hikes, and immigration curbs still being a wildcard.
However, to the extent that any or all of those policy promises are inflationary – in an already sticky inflation environment – the employment report sets the tone ahead of Trump’s inauguration on January 20.
For stock markets, the focus on bonds may start to shift somewhat as the fourth-quarter earnings season gets underway – with S&P500 companies on aggregate expected to have clocked 10% profit growth last year and analysts penciling a further 14% gain in 2025.
Delta Air Lines (NYSE: DAL), Walgreens Boots Alliance (NASDAQ: WBA), and Constellation Brands (NYSE: STZ) kick off the reporting season on Friday – with the big banks due next week.
For tech companies, there was good news from Taiwan, with the world’s largest contract chipmaker, TSMC (NYSE: TSM), reporting fourth-quarter revenue that easily beat forecasts as it reaped the benefit of artificial intelligence demand.
Overseas, the bond market ructions have rippled worldwide this week, too – with Britain’s government bond market in the crosshairs as 30-year gilt yields there hit 27-year highs and 10-year benchmarks reaching levels not seen since 2008.
Even though those gilt yield rises are primarily just in line with what’s happened in U.S. Treasuries, a worrying development in the UK is that the sterling has turned tail too and stopped following higher domestic yields.
Gilts remained on edge first thing Friday, but yields remained below the week’s peaks, and the pound recovered some ground from Thursday’s 14-month low against the dollar.
Stocks in Asia were under pressure, with the leading Chinese and Japanese indexes down more than 1% each.
On Thursday, China’s inflation numbers showed the country still battling pervasive deflationary pressures.
China’s central bank is expected to deploy its most aggressive monetary tactics in a decade this year as it tries to stimulate the economy and soften the blow of impending U.S. tariff hikes, but in doing so, it risks exhausting its firepower.
Friday’s announcement by the People’s Bank of China that it has suspended treasury bond purchases due to the asset’s scarcity highlighted the limitations of its resources as it confronts an increasingly challenging economic environment.
Key developments that should provide more direction to U.S. markets later on Friday:
* US December employment report, University of Michigan January consumer sentiment survey, Canada Dec employment report
* US corporate earnings: Delta Airlines, Walgreens Boots Alliance, Constellation Brands
* Britain’s finance minister Rachel Reeves will visit China
