A robust December jobs report concluded a week where investor anxieties over persistent high interest rates exerted downward pressure on stocks. The S&P 500 (^GSPC), the Nasdaq Composite (^IXIC), and the Dow Jones Industrial Average (^DJI) all registered weekly declines of approximately 1%.
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The prevailing market concern centers on the possibility of inflation failing to sustain its downward trajectory toward the Federal Reserve’s 2% target. Two crucial inflation readings will be released in the coming week. Tuesday’s report on wholesale inflation will precede Wednesday morning’s highly anticipated Consumer Price Index (CPI) data. Updates on retail sales, inflation expectations, and housing activity are also scheduled for release.
In corporate news, the week will be highlighted by quarterly earnings reports from prominent financial institutions, including JPMorgan (JPM), Citi (C), Wells Fargo (WFC), Bank of America (BAC), BlackRock (BLK), Goldman Sachs (GS), Morgan Stanley (MS), and the semiconductor giant Taiwan Semiconductor (TSM).
Inflation Data Takes Center Stage
The December jobs report indicated a more resilient US labor market than initially anticipated. Friday’s data from the Bureau of Labor Statistics revealed the creation of 256,000 new jobs in December, significantly exceeding economists’ forecasts of 165,000 and surpassing November’s figure of 212,000. Concurrently, the unemployment rate decreased to 4.1% from 4.2% in the previous month. Revisions to previous data further reinforced this positive trend. The cycle high for the unemployment rate, initially reported as 4.3% in July, was revised downward to 4.2%.
This robust jobs report has instilled confidence among many strategists that the Federal Reserve will maintain its current interest rate policy. Some analysts even suggest the possibility of rate hikes in 2025. Bank of America Securities US economist Aditya Bhave anticipates an “extended hold” by the Fed but acknowledges the “risks for the next move are skewed toward a hike.” He emphasizes that a rate hike would require a significant trigger, such as a reacceleration of the Fed’s preferred inflation gauge (Personal Consumption Expenditures excluding food and energy) or a rise in inflation expectations.
Morgan Stanley chief US economist Michael Gapen highlighted the report’s implication that “Fed cuts are about inflation now.” As of Friday afternoon, markets were pricing in a single interest rate cut for 2025, with the CME FedWatch tool indicating a less than 50% probability of a rate cut before the end of the June meeting.
Assessing Inflationary Pressures
The upcoming release of the December Consumer Price Index (CPI) will provide a crucial update on inflation. Economists project headline inflation to reach 2.9% annually in December, up from 2.7% in November. Month-over-month price increases are expected to remain at 0.3%, consistent with the previous month. Core CPI, excluding food and energy, is anticipated to hold steady at 3.3% year-over-year for the fifth consecutive month.
The Wells Fargo economics team cautions that “we are approaching another speed bump on the road to 2% inflation,” citing rising energy and food prices as contributing factors to their forecast of a 0.4% monthly CPI increase in December.
Gauging Consumer Spending and Economic Growth
Thursday’s retail sales data will offer insights into consumer spending patterns at the close of 2024. Economists predict a 0.5% month-over-month increase in retail sales for December. The control group of retail sales, excluding volatile categories and directly influencing GDP calculations, is projected to rise by 0.3%. Preliminary indicators suggest a strong start to the fourth quarter for economic growth, with the Atlanta Fed GDPNow tracker currently estimating a 2.7% growth rate.
Market Outlook and Earnings Season
Recent weeks have witnessed a stock market downturn amid surging interest rates. The 10-year Treasury yield (^TNX) rose approximately five basis points on Friday, nearing 4.8%, its highest level since November 2023. The inverse correlation between bonds and stocks has persisted, with rising yields coinciding with falling stock prices. Consequently, positive economic news that drives yields higher has negatively impacted stocks. Citi US equity strategist Scott Chronert suggests that this scenario of “good economic news is bad market news” could persist for an extended period.
The upcoming earnings season may offer a catalyst for a shift in market sentiment. Wall Street anticipates another robust quarter of earnings reports, with consensus estimates projecting an 11.7% year-over-year earnings growth, the highest in three years. State Street Global Advisors chief investment strategist Michael Arone emphasizes the importance of focusing on earnings growth rather than solely on the number of potential Fed rate cuts.
Economic Calendar and Earnings Releases
The week ahead is packed with key economic data releases and corporate earnings announcements. Refer to the original article for the complete weekly calendar outlining specific data points and reporting companies for each day. This information will be crucial for investors navigating the market in the coming week.
