A have a look at the day ahead in U.S. and global markets from Mike Dolan
After a torrid begin to the 12 months for U.S. Treasuries and global sovereign bonds at large, Friday tests the ‘hot economy’ thesis by revealing just how tight U.S. labor markets still are as a latest administration takes office in Washington this month.
The discharge on Friday of the U.S. December employment report ties up quite a lot of jobs market updates this week – with something of a mixed picture to this point.
The weekly jobless series released on Wednesday was a standout, because it indicated the bottom unemployment claims in eight months. November job openings also rose. But private sector payroll growth missed forecasts and Thursday saw data showing each hiring and layoffs slowed last month.
With the national payrolls report potentially a decider on all of the above, consensus expectations are for jobs growth to have softened overall in December to some 160,000 – with an unemployment rate regular at 4.2%.
If that pans out, the Federal Reserve will likely feel justified with a stance of further cautious rate cuts ahead. Its policymakers have indicated just two more quarter point reductions for this 12 months, regardless that futures markets price marginally lower than that – some 41 basis points as of Friday and with the primary 25bp not coming until June.
On Thursday, the most recent Fed speakers tilted hawkish.
Kansas City Federal Reserve President Jeff Schmid signaled a reluctance to chop rates of interest again. “I feel we’re near the purpose where the economy needs neither restriction nor support and that policy needs to be neutral,” Schmid said.
Fed governor and well-known hawk Michelle Bowman said she supported last month’s rate of interest cut because the “final step” within the central bank’s monetary policy recalibration.
With Thursday’s market closures for the funeral of former President Jimmy Carter acting as something of a firebreak in an anxious first full trading week of the 12 months, long-dated Treasury yields remain elevated ahead of the payrolls report.
At 4.94%, the 30-year ‘long bond’ yield continues to be stalking 5% for the primary time since October 2023, while 10-year benchmark yields at 4.70% remain near this week’s 8-month highs.
Spurred partially by some extreme cold weather snaps across the Northern hemisphere, oil prices remain an aggravator and U.S. crude hit its highest since October.
The dollar index also stays pumped up near the two-year high set last week.
With Wall Street stock markets closed on Thursday, futures there are barely within the red ahead of Friday’s reopening.
In fact the payrolls report addresses just one in all the bond market concerns, with anxiety and uncertainty in regards to the extent of President-elect Donald Trump’s planned tax cuts, tariff hikes and immigration curbs still a wildcard.
But to the extent that all or any of those policy guarantees are inflationary – in an already sticky inflation environment – the employment report sets the tone ahead of Trump’s inauguration on Jan. 20.
For stock markets, the concentrate on bonds may begin to shift somewhat because the fourth-quarter earnings season gets underway – with S&P500 firms on aggregate expected to have clocked 10% profit growth last 12 months and analysts pencilling an extra 14% gain in 2025.
Delta Airlines, Walgreens Boots Alliance and Constellation Brands kick off the reporting season on Friday – with the large banks due next week.
For tech firms there was excellent news from Taiwan, with the world’s largest contract chipmaker TSMC reporting fourth-quarter revenue that easily beat forecasts because it reaped the good thing about artificial intelligence demand.
Overseas, the bond market ructions have rippled the world over this week too – with Britain’s government bond market within the crosshairs as 30-year gilt yields there hit 27-year highs and 10-year benchmarks reaching levels not seen since 2008.
Despite the fact that those gilt yield rises are largely just in keeping with what’s happened in U.S. Treasuries a worrying development within the UK is that sterling has turned tail too and stopped following domestic yields higher.
Gilts remained on edge very first thing Friday, but yields remained below the week’s peaks and the pound recovered some ground from Thursday’s 14-month low against the dollar.
Stocks in Asia were under pressure, with the major Chinese and Japanese indexes down greater than 1% each.
Inflation numbers from China on Thursday showed the country still battling pervasive deflationary pressures.
China’s central bank is anticipated to deploy this 12 months its most aggressive monetary tactics in a decade because it tries to stimulate the economy and soften the blow of impending U.S. tariff hikes – but in doing so it risks exhausting its firepower.
Friday’s announcement by the People’s Bank of China that it has suspended treasury bond purchases attributable to the asset’s scarcity highlighted the constraints of its resources because it confronts an increasingly difficult economic environment.
Key developments that ought to provide more direction to U.S. markets afterward Friday:
* US December employment report, University of Michigan January consumer sentiment survey, Canada Dec employment report