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Last Week on Wall Street – January 11th, 2025

  S&P 500: -1.94%      DOW:  -1.86%       NASDAQ:  -2.4%      10-YR Yield: 4.76%

What Happened?

The U.S. stock market experienced a challenging week, with major indices posting back-to-back losses as a strong December jobs report and rising Treasury yields dampened hopes for additional Federal Reserve rate cuts in 2025. The S&P 500 and the Dow Jones Industrial Average each fell 1.9%, while the Nasdaq Composite dropped 2.3%. Energy was the only sector to finish the week in positive territory, gaining 0.4%, supported by a rise in crude oil prices after the U.S. imposed new sanctions on Russian oil. Technology and small-cap stocks saw notable declines, with growth-oriented companies and those sensitive to borrowing costs coming under pressure.

The December jobs report revealed the U.S. added 256,000 jobs, far exceeding expectations of 155,000, while the unemployment rate dropped to 4.1%. This robust labor market data reduced the likelihood of additional Fed rate cuts, driving the 10-year Treasury yield to 4.77%, its highest level in over a year. Additionally, consumer sentiment missed expectations, with one-year inflation expectations rising to 3.3%, the highest since 2008, further weighing on investor sentiment.

Market dynamics this week reflected concerns that the Fed may pause rate cuts amid stronger-than-expected economic resilience and persistent inflation. The probability of a March rate cut fell sharply, with markets now pricing in a more cautious monetary policy path. Looking ahead, tighter financial conditions, ongoing inflationary pressures, and potential fiscal policy changes under the new administration could pose challenges to market stability while providing selective opportunities for investors. s performance historically serving as a bellwether for the rest of the year.

Hiring Blew Past Expectations With 256,000 Jobs Added in December 

  • Nonfarm payrolls surged by 256,000 for the month, up from 212,000 in November and above the 155,000 forecast.
  • The unemployment rate edged down to 4.1%, one-tenth of a point below expectations. A broader jobless measure moved down to 7.5%, a decrease of 0.2 percentage point and the lowest since June 2024.
  • Average hourly earnings increased 0.3% on the month, which was in line with forecasts, but the 12-month gain of 3.9% was slightly below the outlook. 

The key takeaway – The U.S. labor market demonstrated unexpected strength in December, with 256,000 jobs added, significantly surpassing forecasts of 155,000, and the unemployment rate edging down to 4.1%. This marks the strongest monthly job gain since March and signals a recovery from midyear concerns about a cooling labor market. Wage growth also moderated, rising 0.3% month-over-month, aligning with expectations and reinforcing the Fed’s view that labor is not a primary driver of inflation.

This robust labor market performance likely cements the Federal Reserve’s decision to maintain current interest rates, effectively ending its easing cycle for now. Economists suggest the strong jobs data could even put rate hikes back on the table if inflation picks up. However, potential challenges loom with the incoming administration’s plans to curb immigration and impose new tariffs, both of which could disrupt labor supply and drive prices higher. Despite these uncertainties, the labor market remains balanced and resilient, contributing to a solid economic foundation heading into 2025.

Fed Governor Bowman Says December Interest Rate Cut Should Be The Last

  • Federal Reserve Governor Michelle Bowman said Thursday she supported the recent interest rate cuts but said the December reduction should be the “final step” in the easing process.
  • Even with the full percentage points of cuts from September through December, there are still “upside risks to inflation,” she added.
  • Other Fed speakers this week provided views contrary to that of Bowman, who is generally regarded as one of the committee’s more hawkish members. 

The key takeaway – Federal Reserve Governor Michelle Bowman expressed support for the recent interest rate cuts but emphasized that no further reductions are necessary. Speaking to bankers in California, Bowman stated that the December quarter-point cut should mark the end of the current rate adjustment cycle, as inflation remains “uncomfortably above” the Fed’s 2% target. She noted that the policy rate is near neutral and cautioned about “upside risks to inflation,” with core inflation at 2.8% in November.

Bowman’s hawkish stance contrasts with more optimistic views from other Fed officials, such as Governor Christopher Waller, who anticipates further rate cuts. Regional Presidents Susan Collins and Patrick Harker also suggested that modest reductions might be possible later in the year. However, Bowman warned against loosening policy too much, citing strong stock market gains and rising Treasury yields as signs that current rates are adequately restraining economic activity. She called for a cautious and gradual approach while urging colleagues to remain open-minded about potential economic impacts from the incoming administration’s policies on tariffs and immigration.  

US Trade Deficit Widens on Largest Jump in Imports Since 2022

  • The U.S. trade deficit grew by 6.2% in November to $78.2 billion, driven by a significant 3.4% increase in imports as businesses accelerated shipments ahead of potential tariffs and a possible dockworkers’ strike.
  • The rising trade gap, combined with weak overseas economies and a strong dollar, may weigh on GDP growth for Q4 2024, continuing the trend seen in the third quarter.

The key takeaway – The U.S. trade deficit widened by 6.2% in November to $78.2 billion, driven by a 3.4% jump in imports to $351.6 billion, the largest increase since March 2022, according to Commerce Department data. This surge in imports reflected U.S. companies accelerating shipments to preempt potential dockworker strikes and anticipated tariffs under the Trump administration. Exports also rose by 2.7%, but the trade imbalance remains substantial, with the inflation-adjusted merchandise trade deficit reaching $96.5 billion.

Key drivers of the import increase included consumer goods, capital equipment, and motor vehicles, as businesses sought to secure supplies amid potential disruptions. The trade gap could further weigh on GDP growth for Q4 2024, as weak overseas economies and a strong dollar continue to challenge U.S. manufacturers and service providers. Travel-related exports and imports both hit record highs, while trade deficits with China and Mexico remained steady, and the deficit with Canada expanded slightly.

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