Delta Air Lines (DAL) reported better-than-expected earnings results. So did Walgreens Boots Alliance (WBA). Taiwan Semiconductor Manufacturing Company (TSM) reported record fourth quarter revenues. All good news, but none of it truly appreciated at the broad market level in front of the December employment report.
Before the employment report at 8:30 a.m. ET, futures prices for the Dow, Nasdaq 100, and S&P 500 were all lower — not by much but still indicating a modestly lower open.
That changed after the employment report, because the direction of the 10-yr note yield changed after the employment report. Sitting at 4.70% just before the data hit, the 10-yr note yield is now at 4.76% and the 30-yr bond yield is at 4.99% after scraping 5.00%.
The S&P 500 futures are down 54 points and are trading 0.9% below fair value, the Nasdaq 100 futures are down 230 points and are trading 1.1% below fair value, and the Dow Jones Industrial Average futures are down 321points and are trading 0.8% below fair value.
It is a counter-intuitive response at first blush because the December employment report was quite good (all things considered). Nonfarm payrolls increased by a stronger-than-expected 256,000, the unemployment rate slipped to 4.1% from 4.2%, average hourly earnings growth year-over-year was a sturdy 3.9%, and more people were employed.
The key takeaway from the report for the market is that it was perhaps too good, which makes it think one of two things, if not both: the Fed may have made a mistake cutting rates as aggressively as it did at the end of 2024, thereby fueling the prospect of sticky inflation because the labor market is still strong, and there isn’t going to be another rate cut for an extended period.
The front of the yield curve, which is more sensitive to changes in the fed funds rate, and the dollar, have distilled that thought process. The 2-yr note yield is up seven basis points to 4.34% and the U.S. Dollar Index is up 0.6% to 109.77.
The fed funds futures market is on a similar thought train, having pushed out the probability of the next rate cut to June (57.4%) versus May (38.1%), according to the CME FedWatch Tool.Â
It is all leading to some knee-jerk selling interest as a richly-valued stock market tangles with the rising discount rate and the added investment competition the higher yields will pose for stocks.
We’ll have to see how the trading day progresses given that this report has positive implications for consumer spending and corporate profits, so bear in mind that the way the stock market starts today won’t be as telling as how it closes. But, presumably, it will struggle to get to a better place if the Treasury market doesn’t settle down.
Notable headlines from the December Employment Situation Report:
- December nonfarm payrolls increased by 256,000 (Briefing.com consensus 154,000). The 3-month average for total nonfarm payrolls held steady at 170,000. November nonfarm payrolls revised to 212,000 from 227,000. October nonfarm payrolls revised to 43,000 from 36,000.
- December private sector payrolls increased by 223,000 (Briefing.com consensus 140,000). November private sector payrolls revised to 182,000 from 194,000. October private sector payrolls revised to 9,000 from -2,000.
- December unemployment rate was 4.1% (Briefing.com consensus 4.2%), versus 4.2% in November. Persons unemployed for 27 weeks or more accounted for 22.4% of the unemployed versus 23.1% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.5% from 7.7%.
- December average hourly earnings were up 0.3% (Briefing.com consensus 0.3%) versus 0.4% in November. Over the last 12 months, average hourly earnings have risen 3.9%, versus 4.0% for the 12 months ending in November.
- The average workweek in December was 34.3 hours (Briefing.com consensus 34.3), versus 34.3 hours in November. Manufacturing workweek was little changed at 40.0 hours. Factory overtime dipped 0.1 hour to 2.8 hours.
- The labor force participation rate held steady at 62.5%.
- The employment-population ratio increased to 60.0% from 59.8%.
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Originally Posted January 10, 2025 – December employment report drives interest rate angst
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