Market Volatility Continues as Interest Rate Concerns Dominate
The latest jobs report has capped off a tumultuous week for investors, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all ending the week down around 1%. The primary concern driving market sentiment is the fear that inflation may not continue its downward trend towards the Federal Reserve’s 2% target.
Key Inflation Readings Ahead
Two crucial readings will be released in the week ahead, providing insight into the current state of inflation. On Tuesday, a reading on wholesale inflation will be released, followed by the more widely followed Consumer Price Index (CPI) on Wednesday morning. Additionally, updates on retail sales, inflation expectations, and housing activity are also scheduled for release.
Corporate Earnings Take Center Stage
Quarterly results from major banks, including JPMorgan, Citi, Wells Fargo, Bank of America, and Goldman Sachs, will dominate the corporate news landscape. Taiwan Semiconductor will also release its quarterly results, providing insight into the technology sector.
December Jobs Report Exceeds Expectations
The December jobs report showed the US labor market remains on solid ground, with 256,000 new jobs created, far exceeding the 165,000 expected by economists. The unemployment rate also fell to 4.1% from 4.2% the month prior. Revisions to previous data added to the narrative, with the cycle high for the unemployment rate initially reported as 4.3% in July, revised down to 4.2% in Friday’s release.
Federal Reserve’s Next Move
The strong jobs report has many strategists confident that the Federal Reserve will hold off on further interest rate cuts for now. Some even believe it may have opened the door for the Fed to consider rate hikes in 2025. Bank of America Securities US economist Aditya Bhave noted that while the bar for the Fed to hike is high, should inflation expectations move higher, a hike could be on the table.
Inflation Expectations and Retail Sales
Wall Street economists expect headline inflation to have risen 2.9% annually in December, an increase from the 2.7% in November. Prices are set to rise 0.3% on a month-over-month basis, in line with the month prior. On a “core” basis, which strips out food and energy prices, CPI is expected to have risen 3.3% over last year in December. Retail sales are also expected to have increased 0.5% over the prior month during December.
Stock Market Stumbles
The stock market has struggled in recent weeks as rates have soared. This action played out on Friday as the 10-year Treasury yield added about five basis points to creep near 4.8%, its highest level since November 2023. Bonds and stocks have been negatively correlated, meaning that as yields have risen, stocks have fallen.
Earnings Season Ahead
The upcoming earnings season could be the catalyst to change the sour mood for stocks. Broadly, Wall Street is expecting another strong quarter of earnings reports, with consensus estimates projecting earnings to grow 11.7% year over year, which would mark the highest earnings growth in three years.
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