A hot December jobs report capped off a week in which investor concerns over “higher for longer” interest rates dragged down stocks.
The S&P 500 (^GSPC), the Nasdaq Composite (^IXIC), and the Dow Jones Industrial Average (^DJI) all ended the week down around 1%.
The biggest concern driving markets is that inflation doesn’t continue its downward trend toward the Federal Reserve’s 2% target. Two key readings will greet investors in the week ahead on that front. Tuesday will bring a reading on wholesale inflation before the more widely followed Consumer Price Index (CPI) is set for release on Wednesday morning.
Updates on retail sales, inflation expectations, and housing activity are also on the schedule.
In corporate news, quarterly results from JPMorgan (JPM), Citi (C), Wells Fargo (WFC), Bank of America (BAC), BlackRock (BLK), Goldman Sachs (GS), Morgan Stanley (MS), and Taiwan Semiconductor (TSM) will highlight the week.
A ‘pivot’ to inflation data
The December jobs report showed the US labor market remains on more solid ground than initially thought. Data from the Bureau of Labor Statistics released Friday showed 256,000 new jobs were created in December, far more than the 165,000 expected by economists and higher than the 212,000 seen in November.
Meanwhile, the unemployment rate fell from to 4.1% from 4.2% the month prior. Revisions added to the narrative too. The cycle high for the unemployment rate initially was 4.3% in July, but that figure was revised down to 4.2% in Friday’s release.
Overall, the report has many strategists confident the Federal Reserve will hold off on further interest rate cuts for now. Some on Wall Street think it may have even cracked the door open for the Fed to consider rate hikes in 2025.
“Our base case has the Fed on an extended hold,” Bank of America Securities US economist Aditya Bhave wrote in a note to clients on Friday. “But we think the risks for the next move are skewed toward a hike.”
Bhave noted that the bar for the Fed to hike is high since the central bank has noted that interest rates remain restrictive. But should the Fed’s preferred inflation gauge — the Personal Consumption Expenditures metric, excluding volatile categories like food and energy — reaccelerate or inflation expectations move higher, a hike could be on the table.
Read more: Jobs, inflation, and the Fed: How they’re all related
Morgan Stanley chief US economist Michael Gapen said the report showed “Fed cuts are about inflation now.”
As of Friday afternoon, markets were pricing in just one interest rate cut for 2025. Markets don’t see a more than 50% chance the Federal Reserve cuts interest rates until at least the end of its June meeting, per the CME FedWatch tool.
Price check
A fresh update on inflation will come next week with the release of the Consumer Price Index (CPI) for December. Wall Street economists expect headline inflation was at 2.9% annually in December, an increase from the 2.7% in November. Prices are set to rise 0.3% on a month-over-month basis, per economist projections, in line with the month prior.
On a “core” basis, which strips out food and energy prices, CPI is expected to have risen 3.3% over last year in December. This would mark the fifth straight month of a 3.3% reading of core CPI.
“We are approaching another speed bump on the road to 2% inflation,” the Wells Fargo economics team wrote in a weekly note to clients. “Solid increases in energy and food prices at the end of 2024 underpin our forecast of a 0.4% monthly gain in the Consumer Price Index in December. If realized, the annual rate of inflation will tick up to a five-month high of 2.9%.”
Retail sales
Thursday will give markets an indication of consumer spending levels at the end of 2024. Economists estimate retail sales increased 0.5% over the prior month during December. The control group of retail sales — which excludes several volatile categories like gasoline and feeds directly into the gross domestic product (GDP) — is also expected to have risen by 0.3%.
Entering the release, several trackers point to the fourth quarter being off to a solid start for economic growth. The Atlanta Fed GDPNow tracker currently projects the US economy growing at 2.7%.
Back to fundamentals
The stock market has stumbled in recent weeks as rates have soared. This action played out on Friday as the 10-year Treasury yield (^TNX) added about five basis points to creep near 4.8%, its highest level since November 2023.
Bonds and stocks have been negatively correlated as of late, meaning that as yields have risen, stocks have fallen. Therefore, any good economic news that pushes yields higher has been bad for stocks.
Citi US equity strategist Scott Chronert wrote in a note to clients that the backdrop of “good economic news is bad market news” tends to last for an extended period of time.
Still, the question remains: what can shake the market out of this environment? Nationwide chief market strategist Mark Hackett wrote in a note to clients that the upcoming earnings season could be “the best opportunity” to change the sour mood for stocks.
Broadly, Wall Street is expecting another strong quarter of earnings reports. Consensus estimates project earnings to grow 11.7% year over year, which would mark the highest earnings growth in three years.
“From my perspective, I think investors are wrongly obsessed with how many Fed rate cuts we’re going to get this year,” State Street Global Advisors chief investment strategist Michael Arone told Yahoo Finance. “Earnings are growing, and I think that’s where the focus should be.”
Weekly calendar
Monday
Economic data: New York Fed one-year inflation expectations, December (2.97% previously)
Earnings: KB Home (KBH)
Tuesday
Economic data: NFIB small business optimism, December (100.5 expected), Producer Price Index, month over month, December (+0.3% expected, +0.4% previously); PPI, year over year, December (+3% previously)
Earnings: No notable earnings.
Wednesday
Economic data: MBA Mortgage Applications, week ending Jan. 10 (-3.7% previously) Consumer Price Index, month over month, (+0.3% expected, +0.3% previously); Core CPI, month over month, December (+0.2% expected, +0.3% previously); CPI, year over year, December (+2.9% expected, +2.7% previously); Core CPI, year over year, December (+3.3% expected, +3.3% previously); Real average hourly earnings, year over year, December (+1.3% previously)
Earnings: BlackRock (BLK), BNY (BK), Citi (C), JPMorgan Chase (JPM), Synovus (SNV), Wells Fargo (WFC)
Thursday
Economic data: Retail sales, month over month, December (+0.5% expected, +0.7% previously); Retail sales ex-auto and gas, December (+0.4% expected, +0.2% previously); Import price index, month over month, October (-0.1% expected, -0.4% prior); Initial jobless claims, week ending Jan. 11 (201,000 previously); Import prices, month over month, December (+0.1% previously); Export prices, month over month, December (-0% previously); NAHB housing market index, January (46 prior)
Earnings: Bank of America (BAC), J.B. Hunt (JBHT), Morgan Stanley (MS), PNC (PNC), Taiwan Semiconductor (TSM), UnitedHealth Group (UNH), U.S. Bancorp USB (USB)
Friday
Economic data: Industrial production, month over month, December (+0.3% expected, -0.1% previously); Housing starts month over month, December (+2% expected, -1.8% prior); Building permits month over month, December preliminary (-2.4% expected, +5.2% prior)
Earnings: Citizens Financial Group (CFG), State Street (STT), Truist (TFC), Webster Bank (WBS)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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