This morning, we received some data on the U.S. economy. The reports of interest to those trying to figure out how the Federal Reserve will proceed on the monetary policy front in 2025 were the latest employment figures from payroll processing giant Automatic Data Processing (ADP) and the Labor Department’s weekly unemployment claims data. The ADP report showed that the private sector added 122,000 jobs in December, which was down 24,000 from the prior-month’s tally of 146,000 and below the consensus forecast of 136,000. Gains in healthcare jobs were offset by the third-consecutive monthly decline in manufacturing jobs. Meanwhile, initial unemployment claims for the week ending January 4th totaled 201,000, down 10,000 from the previous week and the lowest level since October. The investment community is closely watching the state of the U.S. labor market, as it will likely determine just how aggressive the Fed will be with reducing the benchmark short-term interest rate.
The jobs market has held up very well the last few years and that, along with a modest uptick in inflation this past fall, has the central bank more guarded with regard to loosening monetary policy. The much-anticipated December report on employment and unemployment is scheduled to be released this Friday at 10:00 A.M. (EST). The equity futures, which were down ahead of the economic data, are now fluctuating around the neutral line after the labor reports were released.
The U.S. equity market has turned in a seesaw performance over the last fortnight, with stocks’ up and down movement not netting out to a major change, but with a bearish undertone to trading. The pickup in volatility, which included another notable intra-day swing in the performances of the NASDAQ Composite and S&P 500 Index yesterday, has been the result of some growing uncertainty about how the Federal Reserve will proceed this year. Recent mixed signals on inflation and labor are giving the Fed some pause as the calendar turned to 2025. We will get a better reading on what the Fed is thinking with the release of the minutes from the December Federal Open Market Committee (FOMC) meeting at 2:00 P.M. (EST) today.
Yesterday, stocks sold off after initially moving higher when some economic data was released at 10:00 A.M. (EST). A stronger-than-expected reading on nonmanufacturing activity from the Institute for Supply Management and a Job Openings and Labor Turnover Survey (JOLTS) showing an increase in job openings raised sentiment that the Federal Reserve will likely need to slow the pace of interest-rate cuts this year. In particular, a bigger-than-expected increase in prices for services last month spooked investors. The Fed has already lowered its 2025 forecast for interest-rate reductions from four to two at the last FOMC meeting. Treasury yields rose on this news and a weaker-than-expected Treasury market auction (more below). The rate on the 10-year Treasury note jumped above 4.70% this morning.
Adding to the woes of the technology stocks yesterday were remarks from NVIDIA (NVDA) CEO Jensen Huang on Monday afternoon. The market was spooked by Mr. Huang’s comment that useful quantum computing may still be decades away. This pressured the stocks of the semiconductor and AI-driven companies and the overall performance of the technology sector. The NASDAQ Composite and S&P 500 Index were the biggest laggards, falling 375 and 66 points, respectively. The Dow Jones Industrials and the small-cap Russell 2000 recorded more-modest declines.
As noted above, the U.S. government’s monthly auction of 10-year Treasury notes drew the highest yield since 2007 after the latest economic data raised sentiment that the Federal Reserve is now less likely to cut interest rates again, possibly not before mid-year. The data reinforced the market’s view that the U.S. economy is still growing and therefore rates are not too restrictive. In this higher borrowing cost environment, some possible “de-risking” by portfolios heavily weighted to the higher-growth sectors can’t be ruled out in the near-to-intermediate term. - William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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