In a surprising twist for the markets, robust U.S. job growth sent shockwaves through stocks and bonds alike on Friday. The latest employment data from the Bureau of Labor Statistics (BLS) revealed a significant jump in payrolls for December, catching investors off guard and triggering widespread market reactions.
Jobs Data Exceeds Expectations
The U.S. labor market proved its resilience with employers adding 256,000 jobs in December—far surpassing the 165,000 forecast by economists. This unexpected surge highlights a stronger-than-anticipated economy, further evidenced by a drop in the unemployment rate from 4.2% to 4.1%, defying predictions of no change.
Bond Yields Soar to Multi-Year Highs
The upbeat jobs report pushed bond yields to their highest levels since late 2023, continuing a months-long upward trajectory. The benchmark 10-year Treasury yield climbed 10 basis points to 4.79%, approaching the psychological 5% threshold that hasn’t been breached since last year’s peak.
The 30-year Treasury yield wasn’t far behind, rising 7 basis points to 5%, nearing its 2023 high. The iShares 20+ Year Treasury Bond ETF (TLT), which tracks long-term Treasury bonds, declined 1% during Friday’s trading, deepening its year-to-date losses to over 2%. TLT, already down 8% in 2024, now faces a tough start to the new year.
Market Reactions Reflect Growth and Fed Policy Expectations
The bond selloff underscores investors’ recalibrated expectations for Federal Reserve policy. With stronger growth signals, markets are increasingly discounting the likelihood of multiple rate cuts in 2025. According to the CME FedWatch tool, the Fed might execute only one minor rate reduction this year.
Stocks Stumble Amid Valuation Concerns
Equities also felt the sting of Friday’s economic data. The SPDR S&P 500 ETF Trust (SPY) dropped 1.9% at its lows, while the tech-heavy Invesco QQQ Trust (QQQ) slid 2.2%. Major indexes extended their losses from record highs set in December. The S&P 500 is now 4.6% below its peak, with the Nasdaq-100 trailing by 6.2%.
Despite Friday’s setbacks, the equity market posted extraordinary gains in recent years. SPY returned 25% in 2024 after a 26% surge in 2023, while QQQ skyrocketed 55% in 2023 and followed up with another 25% in 2024.
The Bull vs. Bear Debate Intensifies
Investors are split on what’s next for the markets. Bulls argue that as long as economic growth and corporate earnings remain robust, equities can weather higher rates. Conversely, bears warn that historically elevated valuations, combined with rising yields, could set the stage for a significant market correction.
As Wall Street digests these mixed signals, all eyes are on the Federal Reserve’s next move and whether the U.S. economy can maintain its current momentum amidst tightening financial conditions. Stay tuned as the markets continue to navigate this shifting landscape.
