Mike Dolan's look at the day ahead in US and global markets
After a tough start to the year for US Treasuries and global sovereign bonds in general, Friday proved the 'hot economy' thesis by revealing how tight US labor markets remain as administration just took effect in Washington this month.
The release of the US December employment report on Friday ties together a range of job market updates this week – with somewhat of a mixed picture so far.
The weekly jobless series released on Wednesday stood out, as it marked the lowest jobless claims in eight months. November job openings also rose. But private sector payroll growth missed forecasts and Thursday saw data showing hiring and layoffs slowing last month.
With the national payrolls report potentially deciding all of the above, consensus expectations for job growth have softened across the board in December to around 160,000 – with the unemployment rate steady at 4.2%.
If that ends, the Federal Reserve will likely feel justified in a stance of further cautious rate cuts ahead. Its policymakers have pegged just two more quarter-point cuts for this year, although futures markets are pricing in slightly less than that – about 41 basis points as of Friday and with the first 25bp not coming until June.
On Thursday, the latest Fed speakers tilted hawkish.
Kansas City Federal Reserve President Jeff Schmid signaled reluctance to cut interest rates again. “I believe we are close to the point where the economy does not need restriction or support and that policy should be neutral,” said Schmid.
Fed governor and well-known hawk Michelle Bowman said she supported last month's interest rate cut as the “final step” in the process of recalibrating the central bank's monetary policy.
With the market closing on Thursday for former President Jimmy Carter's funeral something of a firefight in the year's first full, anxious trading week, long-dated Treasury yields remain elevated ahead of the payrolls report.
At 4.94%, the 30-year 'long bond' yield is still at 5% for the first time since October 2023, while the benchmark 10-year yield at 4.70% remains near 8-month highs this week .
Fueled in part by some glimpses of extreme cold weather across the Northern Hemisphere, oil prices remain a drag and US crude has hit its highest since October.
The dollar index also continues to be pumped up near the two-year high set last week.
With Wall Street stock markets closed on Thursday, futures are slightly in the red before Friday's reopening.
Of course the payrolls report addresses just one of the bond market's concerns, with concern and uncertainty over the extent of President-elect Donald Trump's proposed tax cuts, tariff hikes and immigration curbs still looming large. .
But to the extent that any or all of those policy promises are inflationary — in an already sticky inflation environment — the employment report sets the tone ahead of Trump's January 20 inauguration.
For stock markets, the focus on bonds may start to shift somewhat as the fourth quarter earnings season gets underway – with S&P500 companies overall expecting profit growth of 10% last year and analysts penciling in a further 14% rise in 2025.
Delta Airlines, Walgreens Boots Alliance and Constellation Brands kick off reporting season on Friday – with the big banks expected next week.
For tech companies there was good news from Taiwan, with the world's largest contract chipmaker TSMC reporting fourth-quarter revenue that easily beat forecasts as it benefited from demand for artificial intelligence.
Abroad, bond market declines have rippled across the world this week too – with the British government bond market in the crosshairs as 30-year gilt yields there hit 27-year highs and 10-year benchmarks hit unprecedented levels 2008.
Although that rise in gilt yields is largely in line with what has happened in US Treasuries, a worrying development in the UK is that sterling has also turned tail and come to head left to higher domestic product.
Gilts remained on edge first thing on Friday, but the yield remained below the week's peaks and the pound recovered some ground from Thursday's 14-month low against the dollar.
Stocks in Asia were under pressure, with the main Chinese and Japanese indexes down more than 1% each.
Inflation numbers from China showed on Thursday that the country is still battling the pressures of pervasive deflation.
China's central bank is expected to use its most aggressive monetary tactics in a decade this year as it seeks to stimulate the economy and soften the blow of looming US tariff hikes – but in doing so risks exhausting its firepower.
Friday's announcement by the People's Bank of China that it has halted purchases of treasury bonds due to the scarcity of the asset highlighted the limitations of its resources as it faces an increasingly challenging economic environment.
Key developments that should give US markets more direction later on Friday:
* US December employment report, University of Michigan January consumer sentiment survey, Canadian employment report Dec
