Markets balk at a strong US jobs report

The December US payroll report, which showed the economy producing a better-than-expected 256,000 jobs, was viewed negatively by financial markets. (1) US Treasury yields spiked (2) and US equities sold off. (3) I had thought the balance of risk in the economy had shifted from inflation to growth. If that were the case, one might have expected a strong jobs report to be well received by investors. Alas.

So with respect to Sex and the City’s Carrie Bradshaw, I’ll use my column to pose a question to the reader: When is good news actually bad news?

Good news for the economy is good news for markets when investors believe that inflation is contained, and the path of monetary policy is clear. However, good news becomes less good, or even bad news, when inflation concerns are prevalent and strong economic data leads the market to reduce expectations for future interest rate cuts by the Federal Reserve.

Case in point, the market's expectation for the Fed Funds Rate by the end of 2025 had dropped to as low as 2.75% in the fourth quarter. (4) Currently, the implied rate for 2025 is over 100 basis points higher. (5) Higher rates for longer (or should we say normal rates for longer?) could be expected to put some pressure on equities, at least in the short term. After all, market volatility is almost always driven by policy uncertainty. A new presidential administration and concerns about tariffs and immigration policies may be compounding concerns.

Putting the news into perspective

Lest we get too negative, let’s put the jobs report into perspective:

• For one, it appears that recoveries from hurricanes and the Boeing strike account for much of the upside surprise.
• Two, the leading components of the release were mixed for prospective job growth over the next months. (6)
• Three, wage inflation was below expectations. (7)

I may be in the minority today but that to me doesn’t sound too far from a Goldilocks scenario.

As for whether investors should now be rooting for bad economic releases, I’m skeptical. Inflation expectations, as measured by the 3-year US Treasury inflation breakeven, while rising, are still well within the Fed’s perceived “comfort zone.” (8) That’s a far cry from early 2022 when the 3-year breakeven pierced 4% as US inflation surged. (9) Further, the markets have already priced out all but one of the interest rate cuts this year (10), with thus far limited impact on the broad equity market. (11) In short, there’s not much more to reprice, unless the market believes another tightening cycle is in the offing.

Personally, I’d still prefer strong nominal growth and fewer rate cuts rather than weak growth and more rate cuts. History suggests that when the Fed cuts rates and the economy does not go into recession, then the backdrop for risk assets tends to be sound. (12)

As Carrie Bradshaw might say, I couldn’t help but wonder if Friday’s market reaction is an overreaction.

1. Source: US Bureau of Labor Statistics, 12/31/24.
2. Source: Bloomberg, 1/10/25. Based on the 2- and 10-year US Treasury rates.
3. Source: Bloomberg, 1/10/25. As represented by the S&P 500 Index.
4. Source: Bloomberg, 10/1/24. Based on the Fed Funds Implied Rates.
5. Source: Bloomberg, 1/10/25. Based on the Fed Funds Implied Rates.
6. Source: US Bureau of Labor Statistics, 12/31/24. For example, temporary employment increased.
7. Source: US Bureau of Labor Statistics, 12/31/24. Based on average hourly earnings.
8. Source: Bloomberg, 1/10/25. The inflation breakeven is the difference between the nominal yield on a fixed-rate investment and the real yield on an inflation-linked investment of similar maturity and credit quality.
9. Source: Bloomberg, 1/10/25. The inflation breakeven is the difference between the nominal yield on a fixed-rate investment and the real yield on an inflation-linked investment of similar maturity and credit quality. The 3-year US Treasury inflation breakeven peaked at 4.28% on March 25, 2022.
10. Source: Bloomberg, 1/10/25. Based on the Fed Funds Implied Rates.
11. Source: Bloomberg, 1/9/25. Based on the S&P 500 Index, which is off roughly 4.5% from its peak on 12/6/24 through the morning of January 10, 2025.
12. Source: Bloomberg, 1/9/25. Based on the returns of the S&P 500 Index. Based on the past 16 easing cycles.

Important information

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All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

A basis point is one-hundredth of a percentage point.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The federal funds rate (or fed funds rate) is the rate at which banks lend balances to each other overnight.

The fed funds implied rate reflects market participants’ expectation of where the federal funds rate will be at a certain point in time.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

Inflation is the rate at which the general price level for goods and services is increasing.

Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security of the same maturity.

Real yields are the returns that a bond investor earns from interest payments after accounting for inflation.

A risk asset?is generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.

The S&P 500? Index is an unmanaged index considered representative of the US stock market.

Tightening monetary policy includes actions by a central bank to curb inflation.

The opinions referenced above are those of the author as of Jan. 10, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.