Yields Rise, Stocks Fall After Hot US Jobs Report

For the week ending 10 January 2025

As of midday Friday, global equities were lower on the week amid rising interest rates and concerns over potentially inflationary Trump 2.0 policies. The yield on the US 10-year Treasury note rose 18 basis points from a week ago to 4.75%, the price of a barrel of West Texas Intermediate crude oil added $3.50 to $77, and volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 19.2 from 17.3 last week.

MACRO NEWS

Inflation jitters, policy mix, firm employment data push up yields

US bond yields extended recent gains Friday morning after US nonfarm payrolls rose more than expected. Economists had expected to see about 165,000 new jobs added to US payrolls in December, a number substantially below the actual 256,000 gain. Adding fuel to the fire, the prior two months data were revised up by a net 56,000 additional new jobs and the unemployment rate fell to 4.1%.

Payrolls were not the only source of inflation angst this week as a jump in job openings and a decline in claims for unemployment benefits confirmed broad strength in the labor market. A strong Institute for Supply Management services index, which rose to 54.1 in December from 52.1 in November amid the highest prices-paid component since February 2023, was a further cause for concern.

Percolating in the background are fears that the projected Trump 2.0 policy mix of higher tariffs and a crackdown on illegal immigration will prove inflationary, at least in the short term. Year-ahead inflation expectations, as measured by the University of Michigan survey, rose to 3.3% from 2.8% last month. The yield on the US 10-year Treasury note rose as high as 4.786% Friday morning, the highest level since October 2023. Futures markets now expect the US Federal Reserve to pause its easing cycle until next fall.

UK yields reach 28-year high as fiscal rules threatened

The yield on the United Kingdom’s 30-year gilt-edged bond shot up to 5.42% this week, the highest level since 1998, amid concerns that the UK government is close to breaching its fiscal rules. The Treasury issued a statement on Wednesday to calm those fears, assuring investors that the fiscal rules are non-negotiable and that the government has “an iron grip on the public finances.”  The budget put in place last fall left the government with £9.9 billion in fiscal headroom, but a sharp rise in interest rates in recent months is believed to have removed most, if not all, of that cushion. If that proves to be the case, Chancellor Rachel Reeves will be forced to either raise taxes or cut spending, neither of which is politically palatable amid stagnating UK economic growth. Business sentiment continues to take a hit, with a British Chamber of Commerce survey showing that only 49% of those surveyed expect turnover to increase in 2025, down from 56% before the budget.

Canada’s Trudeau resigns as PM

Justin Trudeau stepped down as leader of Canada’s Liberal Party this week but will stay on as a caretaker prime minister until a replacement is elected. Parliament has been suspended until 24 March, after which a vote of no confidence is expected, leading to a snap election. The Conservative Party of Canada holds about a 24-point lead in the current CBC polling average. The ruling Liberals are in danger of falling behind the Bloc Québécois and becoming the third largest party in the next parliament.

QUICK HITS

Fitch Ratings warned this week of the potential for a US debt ceiling stalemate despite a unified GOP government given the narrow Republican majority in the House of Representatives and disagreements within the party on spending policies.

Composite PMIs were mixed in December, S&P Global reported this week. In the US, the reading fell to 55.4 from 56.6, in Japan it rose to 50.5 in from 50.1, in the eurozone it increased to 49.6 from 48.3 and in the UK it dipped to 50.4 from 50.5 the month before.

Consumer prices in the eurozone ticked up 2.4% year over year in December, up from November’s 2.2% rate. The core rate was steady at 2.7%. The eurozone unemployment rate was unchanged at 6.3% in November. The European Central Bank’s January economic bulletin said that disinflation in the eurozone remains “well on track.”

The US added Tencent and battery maker CATL to its list of companies aiding the Chinese military.

The European Commission reported Wednesday that business sentiment in the eurozone declined further in December amid political instability in France and Germany and the threat of US tariffs. The economic sentiment index fell to 93.7 from 95.6 in November.

China’s consumer price index rose only 0.1% year over year in December, and producer prices fell 2.3% as the economy continued to struggle. This week China expanded its consumer trade-in program to boost domestic demand, adding more home appliances to the list as well as cell phones, tablet computers and smart watches.

During a press conference in Palm Beach, Florida this week US President-elect Donald Trump declined to rule out using military or economic coercion to gain control of Greenland and the Panama Canal. He said he would consider using economic pressure to convince Canada to become part of the US, but he ruled out using military force. Trump emphasized the importance of raising the US debt ceiling to avoid default and called on NATO countries to spend 5% of GDP on defense.

Amid elevated interest rates and inflation, US corporate bankruptcies hit a 14-year high in 2024.

Fed Vice Chair for Supervision Michael Barr will step down from that post on 28 February to avoid the risk of a dispute with the incoming Trump administration but said he will remain on the Board of Governors.

Canada released its own strong employment report on Friday. Economists expected a 25,000 job gain in December, so markets were surprised by a 90,900 increase and a drop in the unemployment rate to 6.7% from 6.9%. After the release of the data, the odds of a Bank of Canada rate cut at the end of January fell to 68% Friday morning from 79% on Thursday.

THE WEEK AHEAD

Tuesday: US PPI

Wednesday: UK CPI, eurozone industrial production, US CPI

Thursday: Japan PPI, Australia unemployment, UK monthly GDP, US retail sales

Friday: UK retail sales, eurozone CPI, US housing starts/building permits, industrial production