Michelle Cluver
Global X ETF Model Portfolio TeamTreasury yields and Federal Reserve (Fed) expectations are back in focus following hotter than expected labor market data. December’s non-farm payrolls came in at +256K jobs added, the highest reading in nine months and well above market expectations. The solid jobs report reflects a resilient U.S. economy running at close to full employment. The unemployment rate ticked down slightly from 4.2% to 4.1%. However, it’s encouraging that wage pressure remained in line with expectations, coming in at 0.3% m/m or 3.9% y/y. Over the last three years there has been significant progress in restoring wage pressure to pre-pandemic levels.
The hot labor force data keeps a focus on inflation expectations and the Fed’s likely trajectory. For the year ahead, we expect the pace of rate cuts to be slow and careful, with close attention on the macro data and its outlook. We may see heightened volatility as markets reassess the Fed’s expected trajectory. 10-year Treasury yields have jumped to 4.76%1, their highest level since October 2023, with markets repricing Fed rate cut expectations for 2025. Currently markets expect only one interest rate cut in 2025, and that cut has been pushed into the second half. But, as was seen in 2024, rate expectations are likely to shift throughout the year – providing a headwind or tailwind for both equity and fixed income performance.
Strong underlying economic growth is beneficial for equity markets, but investors will be looking to see this strength shine through in earnings. The market needs to experience a broadening of earnings strength. The current spike in Treasury yields pushed the S&P 500 Index into negative YTD territory, with mega-caps pulling back more than the overall index. Should underlying earnings growth broaden and reflect economic strength, we could see an improvement in market breadth.
The chart below illustrates that December’s non-farm payrolls reading was expected to decrease relative to November’s reading. However, December’s non-farm payrolls came in at +256K, above the 2024 monthly average of +186K jobs added. Labor market readings have been on an improving trend for the last two months, following a weak October reading that was skewed downwards by hurricanes and strike activity. As illustrated on the second chart, the uptick in December relative to November was primarily due to +43K retail trade jobs being added in December following -29K job losses in this area in November.
