Surprise! The US economy added more than 250K new nonfarm jobs in December, some 90K more than expected, and the unemployment rate fell to 4.1%. If it’s any comfort for the Federal Reserve (Fed) doves: wages growth softened from 4% to 3.9% on a yearly basis. But all in all, the report looked very strong. That’s excellent news for the US economy, and Joe Biden – who will pass on an abatable US economy to his successor. But that’s not necessarily good news for the market, as the strength of the US jobs data further dashed the dovish Fed expectations. The US 2-year yield – that captures the Fed’s rate expectations – jumped to 4.40%, the highest since November, the 10-year yield spiked to 4.78%, the highest since October, and the 30-year yield hit 5%. The probability of no rate cut from the Fed in May spiked to 67% in the aftermath of the data release, and the probability of a June cut is close to a coin flip.
Of course, the melting Fed cut expectations hammered risk appetite and sent the S&P500 more than 1.50% lower on Friday. The index closed a touch above its 100-DMA. The Nasdaq 100 gap opened below its 50-DMA and lost a similar amount, while the Dow Jones slipped 1.63% and the small caps tanked more than 2% on rising US yields and prospects of higher Fed rates for longer than imagined. The latter puts the optimistic outlook for the stocks at jeopardy.
Especially, the fact that the US yield curve has been steeping is not good news for stock valuations, as stocks tend to face larger setbacks when long-term yields climb more rapidly than short-term ones, reflecting inflationary pressures or tightening financial conditions. So, sentiment is fragile walking into the new week, with the VIX index gently moving toward the 20 level.
Week ahead
The US will release its latest inflation updates tomorrow and Wednesday. Tomorrow, the producer price index will give an idea on the evolution of prices paid by producers, and is expected to show a slowdown from 3.4% to 3.2% in December. However, on Wednesday, the CPI data is expected to print an uptick in US headline inflation from 2.7% to 2.9%. Core inflation is also seen super-sticky above the 3% mark. A sufficiently strong set of inflation data could throw the expectation of a June cut under the bus, as well. If that’s the case, stock investors could only rely on earnings to keep their heads above water.
On that front, the US big banks will open the dance this week, with JP Morgan, Wells Fargo, Goldman and Citigroup expected to announce their earnings on Wednesday, Bank of America and Morgan Stanley on Thursday. TSM will also announce its Q4 earnings on Thursday and the expectations remain high. Nvidia’s partner in crime announced that its Q4 sales rose 39% to around $26.3bn and topped estimates, giving a clear indication that the AI spending will extend into the new year. TSM shares eked out a 0.60% gain on Friday despite a broad market turmoil. Nvidia shares however couldn’t enjoy the good news and tanked 3% on Friday.
Back to the banks, the financial stocks in the S&P500 jumped up to 40% last year and are now around 28% up compared to the beginning of last year. The high interest rates – especially the steepening yield curve – offered the US banks the possibility to pocket interesting net interest revenue. Plus, trading activity was strong and deal making picked up. As such, the financials are expected print nearly 40% increase in their earnings last quarter. The easy comparison to the year before helps, as well: the regional banks, for example, are projected to report earnings of $3.1 billion compared to a loss of -$3.8 billion a year ago.
Zooming out, the S&P500 companies are expected to print a 11.7% earnings growth in the Q4 of 2024. But Factset highlights that the index will likely report year-over-year growth in earnings above 14% for the fourth quarter based on the average improvement in the earnings growth rate during the earnings season. If that’s the case, a better-than-expected earnings season could throw a floor under a potential selloff in the US stocks. But the deteriorating Fed expectations remain the major risk to the positive outlook.
FX & energy
The US dollar kicks off the week on a positive footage and the EURUSD is testing the 1.02 support this morning, with growing chance of pulling out this support on the back of a broad-based strength of the dollar due to the rising hawkish Fed expectations.
In energy, US crude advances with big steps. The barrel of US crude trades above the $78pb mark for the first time since October as the US and the UK, together, announced important sanctions against two major Russian oil companies – that exported just below 1mbpd in the first 10 months of 2024, around 30% of Russia’s total flows on tankers, according to Bloomberg. The US also sanctioned more than 180 vessels associated with Russia’s shadow fleet, doubling the number of targeted oil tankers. The latest actions are expected to counter the 1mbpd oil surplus forecasted by the IEA this year. The price of crude rose too fast in a too short period of time, sending the RSI index into the overbought territory, yet the short-term outlook is positive, and the US crude could test the $80pb level in the extension of the rally. Price pullbacks could be interesting opportunities to strengthen tactical long positions. In the medium run, sentiment is mixed on the back of unsupportive global economic/China outlook. Strong resistance is seen into the $80pb psychological level.
