WEEKLY MARKET SUMMARY

Global Equities: US stocks continued their rough start to 2025, capped with a Friday selloff following a strong jobs report that triggered inflation concerns. The S&P 500 ended the week -1.9% lower, the Nasdaq Composite fell -2.3%, and the Dow Jones Industrial Average ended with a -0.5% weekly loss. Small Caps sold off sharply on rising interest rates, ending the week down -3.4% and have now given back all their gains from the Presidential election bounce. Developed International stocks also traded lower during the week, losing -0.8% and Emerging markets stocks slipped -2.5%.

Fixed Income: A sharp rise in yields was the big story of the week, with the 10-year Treasury yield hitting its highest intraday level since October 2023 at nearly 5%. 30-Year yields breached 5% before settling at 4.95% as of market close Friday. Markets are now in the “good news is bad news” mindset, with a strong economy being considered inflationary. Fed Funds Futures market data show the market is no longer anticipating a first half 2025 Fed rate cut. High yield bonds were down -0.5% during the week, a modest loss as the strong jobs report suggests a recession is not imminent.

Commodities: US West Texas Intermediate (WTI) Crude prices rose on new US sanctions aimed at Russian oil producers, tankers, intermediaries, traders, and ports. WTI hit $76.60 as of Friday afternoon, the highest level since October 2024.

WEEKLY ECONOMIC SUMMARY

December Jobs Report: The latest reading of US job growth crushed expectations, with nonfarm payrolls rising 256,000 during the month, exceeding estimates of 157,000 jobs. The unemployment rate fell to 4.1%. Most importantly, average hourly earnings eased to 0.3% for the month to bring the annual rate down from 4.0% to 3.9%, a positive indicator for inflation. The jobs data suggests the US economy continues to fire on all cylinders, which normally would be positive news. The market sold off sharply, however, because the economic strength is viewed as potentially inflationary and likely to give the Fed another reason to push back further rate cuts.

FOMC Minutes: The minutes from the December Fed meeting confirmed the committee’s view that while inflation is expected to gradually move towards 2%, the timeline has been extended. Uncertainty over President Trump’s proposed policies of deportations and tariffs were also discussed as potential sparks that could reignite inflation. The cautious tone, combined with Friday’s strong jobs report, suggests further rate cuts are off the table for the time being.

Chinese Bond Catastrophe: The Chinese central bank announced it would stop buying government bonds this week to halt the staggering plunge in yields that has taken the 10-year bond yield to a record low of 1.6%. Concern is growing that China is falling into a deflationary spiral that could usher in a prolonged economic downturn, similar to Japan’s “lost decades”.

CHART OF THE WEEK

The Chart of the Week shows the 10-Year Treasury Yield, over the last twenty-five years. While the Fed’s rate cuts were supposed to bring rates down across the board, the opposite has happened. While sticky inflation is partially to blame, the bigger growing concern is the ever-growing Federal deficit. Despite strong US GDP growth, lawmakers continue to spend more than they bring in, and the bond market is sending a clear message that the bill for all that spending is coming due. Yields have reached a new post-Global Financial Crisis high, and it appears the runway to 5% and beyond is in sight.