Strong Job Growth and Rising Yields Impact Financial Markets

The December jobs report took financial markets by surprise during early trading on Friday. The report showed stronger-than-expected job growth and a drop in the unemployment rate, sparking concerns that the Federal Reserve may not cut interest rates as anticipated in 2025.

December Jobs Report Raises Concerns for Interest Rates

The U.S. economy added 256,000 new jobs in December, an increase from the revised 212,000 jobs added in November. This figure significantly surpassed economists’ expectations of 160,000 new jobs, as noted by TradingEconomics. The robust job growth was the best seen since March 2024 and illustrated the ongoing strength of the U.S. economy, even amid high interest rates and rising inflation.

The unemployment rate fell from 4.2% to 4.1% in November, which was unexpected, as many analysts thought the rate would remain unchanged. Wages also saw an increase, with average hourly earnings rising by 0.3% month-over-month, a slight decrease from November’s 0.4%. Year-over-year wage growth reached 3.9%, just below the 4% projection.

Following the job report, futures for Federal Reserve rate cuts showed a steep decline. The chance of a rate cut in March dropped to 26% from 43%, per CME’s FedWatch tool.

Treasury yields reacted strongly to the news, increasing across various maturities. The two-year yield rose by 11 basis points to reach 4.37%, while the 10-year yield jumped by 10 basis points to 4.79%, marking its highest level since November 2023. Most notably, the 30-year yield crossed the 5% threshold for the first time since October 2023, causing significant market concern.

These movements led to a 1.2% decline in the iShares 20+ Year Treasury Bond ETF, reflecting market unease about increasing long-term rates.

Additionally, the U.S. Dollar Index, noted by the Invesco DB USD Index Bullish Fund ETF, rose by 0.5% to 109.70, a peak not seen since late October 2022. The dollar was up 0.4% against the Japanese yen and climbed 0.6% versus the euro, pushing the euro-dollar pair to a 27-month low.

Stock Market Reaction

Stock futures showed a decline of 1% across major U.S. indices as investors reacted to the potential for sustained high interest rates. The S&P 500 saw nearly all sectors retreating except energy.

Both real estate, as measured by the Real Estate Select Sector SPDR Fund, and technology, represented by the Technology Select Sector SPDR Fund, fell 1.4%. These sectors, sensitive to rate changes, struggled under the pressure of rising yields, affecting long-duration assets.

The energy sector, however, was an exception, with the Energy Select Sector SPDR Fund climbing 1.3%.

Notable Movers in the Market

In the energy sector, Chevron Corp. gained 1.67% to reach $152.81, Exxon Mobil Corp. rose 1.57% to $108.61, and ConocoPhillips advanced 1.43% to $103.07 as oil prices spiked by 3% due to speculation over stronger sanctions on Russia’s oil sector.

Conversely, several major technology stocks suffered declines. Nvidia Corp. dropped 2.51% to $136.59, Advanced Micro Devices Inc. fell 2.92% to $118.28, and American International Group Inc. plunged 3.93% to $68.63, leading the downturn among financials.

Overall, the job growth and shifting interest rate projections create a complex outlook for investors navigating this unpredictable economic landscape.

economy, jobs, stocks, yields, markets