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Financial Market Update – Week of 01/13

January 13, 2025

The new year got underway with December payroll data coming in white-hot and recently released Fed Minutes showing inflationary concerns. 

Given these and other recent developments, now is a good time to keep you updated about what happened last week. 

Overall, U.S. stock market indexes declined for the week ending 01/10, as the S&P 500 decreased by 1.94%, the Nasdaq 100 traded lower by 2.24%, and the Dow Jones Industrial Average fell by 1.86%.

Smoking Hot Payrolls

Hot off the presses, December payrolls came in hot, showing 256,000 jobs created for the month versus 155,000 expected. Normally, this would be a welcome indicator of a strong U.S. jobs market and a sign that recession is not an imminent risk, pleasing investors. 

But this time, market participants weren’t too happy to hear the news, as the hot economic data translated to lower probabilities of a Fed rate cut at the January meeting.

In fact, the odds of a January rate cut from the Fed shrank to 6.4% as of last week’s market close, according to the CME FedWatch Tool.

The unemployment rate declined by one tick to 4.1% versus the previously reported 4.2% in November.

Fed Minutes: Inflation Warning

Inflation persists. That is no secret.

As you may know, the Fed recently indicated fewer rate cuts than previously anticipated for 2025.

Adding to the message, recently released meeting minutes from the December Fed conference showed that Fed officials are concerned about the uncertainty surrounding Trump’s policies on inflation, with at least four mentions of trade and immigration policy uncertainty.

“In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes read.

One takeaway from the minutes was that most Fed officials were concerned about inflation risks — but not concerned enough to put rate hikes back on the table. 

Equity Market Response

The S&P 500 was slightly higher (just barely) on the day of the Fed minutes release.

With the minutes showing nearly all Fed committee participants concerned about inflation risks, investors may have grown a bit concerned. However, equity markets stuck together well overall, as many are coming to grips that inflation uncertainty is alive and well.

After we got the minutes last Wednesday, traders eagerly anticipated Friday’s jobs data — and with such a hot print, major U.S. equity indexes sold off to end the week on Friday, resulting in moderately lower weekly settlement values.

U.S. Dollar Rally Continues

In a mostly “risk-off” style of trading last week, the U.S. dollar continued its recent rise against other major currencies. The U.S. Dollar Index (DXY)  measures the strength of the U.S. dollar against a basket of six other currencies. 

Gold and silver rose along with the dollar last week. The spot price of gold rose by around 1.88% last week, settling around 4% lower than its all-time high made in October.

Spot Bitcoin (Coinbase) was lower by around 4.32% last week (as of late Friday evening). Spot bitcoin trades 24/7 on several different exchanges, and ETFs for spot bitcoin saw large inflows in their first year of existence. 

Sometimes, a stronger dollar can impact gold and/or silver negatively, but that has not been the case lately. The safe-haven bid was alive and well last week.

Government Bond Yields Rise 

Markets like certainty, and if they cannot have that, they look to bond yields for clues about the direction of the U.S. economy. Investors were quick to sell treasuries last week, and yields moved higher, with the U.K. in focus.

U.K. Impacts: Bonds selling off in the U.K. certainly added some selling pressure here at home. High levels of government debt have contributed to the UK’s 10-year gilt yield being at its highest since 2008. So, the rise in interest rates is currently seen as a global move, but it is being led by the U.K.

Treasury Yield Data: Overall, 10-year Treasury yields traded higher by around 18 basis points last week, settling near 4.775%. The recent weekly settlement value is the highest since October 2023, with 5.00% suddenly in view.

The recent key level high in 10-year yields was in April 2024, near 4.739%. Last week’s settlement was above this level.

Looking Ahead

The rising U.S. dollar, bond yields, and precious metals were evidence of safe haven buying last week. Will we get a substantial pullback in equity markets anytime soon? Last week, the S&P 500 settled approximately 4.5% lower than its weekly all-time closing high, so long-term investors could consider having some dry powder on hand in the event of a substantial pullback in the near future to take advantage of potential long-term opportunities.

For major economic data releases this week, we get Producer Price Index (PPI), Consumer Price Index (CPI), and retail sales data. Markets will have more time this week to digest last week’s rise in bond yields, given the shortened trading week in observance of the late President Jimmy Carter.

Eyes will be on U.K. markets ahead of the U.S. opening bells this week with all hands on deck heading into the CPI data.

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