The Federal Reserve may not be able to reduce its benchmark interest rate until late fall, market-derived data suggested on Friday, as a global sell-off in government bond markets suggests widespread inflationary pressures in the coming months.
A better-than-expected December jobs report, which included 256,000 new hires, most of them in the private sector, is weighing on Treasuries. Signs that companies are reluctant to lay off workers until they have more certainty about the economy's prospects under President-elect Donald Trump are also contributing to the sell-off, pushing stocks lower.
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Benchmark 10-year Treasury bond yields, which play a key role in defining a risk-free rate by the global financial market, hit the highest levels since early spring on Friday following the U.S. Treasury report. December employment.
At around 4.77%, the 10-year yield is also likely to add upward pressure on mortgage rates, which tested the 7% threshold last week and are likely to rise further in the coming weeks. This will slow any chance of a real estate recovery until at least the spring or summer months.
Meanwhile, benchmark 2-year bonds are testing the 4.4% level as investors anticipate a “higher for longer” rate environment.
ANDREW CABALLERO-REYNOLDS/AFP via Getty Images
More immediately, however, rising Treasury yields are affecting investors' calculations for U.S. stocks, which are based in part on the so-called risk-free rate (and fall further when rates rise), as well as bets that the Federal Reserve will reduce its reference interest rate during the first half of the year.
In fact, the S&P 500 ended Friday down 1.54%, putting the benchmark index just a few points north of where it closed on Election Day in early November.
Interest rate cuts will have to wait
“With the arrival of a new Administration, policies such as immigration reform, government contracting (or closures and layoffs), and incentives to spend more aggressively in places like energy, will influence the 'round trip' of job demand in the country. “said Rick Rieder, chief investment officer of global fixed income at BlackRock.
“And furthermore, the Fed has cited, almost as a requirement, that there would have to be soft working conditions to continue moving the Fed Funds policy rate to lower levels, and we didn't see much motivation for that today,” he added.
Related: Jobs report surprise has big implications for bets on Fed rates and Treasury yields
CME Group's FedWatch tool, which tracks bets on rate changes in real time, now pegs the Fed's first interest rate cut in October. The odds of another cut by the end of this year are only 23.1%.
That could add further complexity to a market seeking Fed easing to justify the valuations it assigns to stocks. By some estimates, the valuations are the highest in five years. Markets are also betting on cuts to further boost the national economy.
This dynamic may be crucial to the president-elect's broader ambitions for tax cuts, tariffs and immigration reform. For the most part, these actions are based on the United States' ability to “grow its way out” of a debt burden that is on track to surpass $40 trillion by early next month.
Higher Treasury yields will drain capital from investments aimed at economic growth, slow the housing market's recovery and drain more cash from the Treasury for debt service payments.
About those 40 billion dollars…
This is likely to trigger another round of debt ceiling debate on Capitol Hill. The current suspension ended earlier this month and so-called “extraordinary measures” to compensate are likely to come into effect next week.
Meanwhile, Congress may find it difficult to justify a corporate tax cut, a key element of the president-elect's economic agenda, when debt levels, servicing costs and mortgage rates are rising.
“While we do not expect the United States to default on its debt, we highlight that upcoming debt negotiations may be entangled with fiscal policy concerns about growing debt and deficits, which will ultimately slow the pace of policy formulation. policies in 2025,” said Mónica Guerra, head of US Policy at Morgan Stanley Wealth Management.
Related: Skyrocketing bond yields deal blow to stocks
So the market focus is likely to remain firmly on both rising Treasury yields, which are being reflected in increases in government borrowing costs in the world's major economies, and the short path inflation term.
The University of Michigan's benchmark consumer confidence survey, released Friday, showed inflation expectations for the coming year rose to 3.3% last month, the highest level since June 2008.
Inflation is not over yet
“The wobble in the stock market, the slight increase in gas prices and the spike in mortgage rates probably weighed slightly on consumer confidence earlier this month,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. Joined.
“But reading between the lines, concerns about the potential impact of some of Donald Trump's economic policies also appear to be weighing on confidence,” he added.
Related: Bonds are the key to the future of stocks
Global oil prices aren't helping either. US crude oil has hit the highest levels since early October, approaching the $80 per barrel mark, following reports that outgoing President Joe Biden could tighten sanctions on Russia before leaving office at the end of this year. month.
The Commerce Department will release its CPI inflation estimate for the same month next week. Still, with the better-than-expected December jobs report, economists will likely have to recalibrate their initial forecasts of a pullback in underlying and overall pressures.
“On the precipice of this new year and new administration, there are many unknowns,” said Elizabeth Renter, senior economist at Nerd Wallet.
“When it comes to the economy, there are the current paths that we can see in the data, those that may not yet be clear, and a whole host of possibilities that have yet to be decided, let alone influenced,” he added. . .
Related: Veteran Fund Manager Issues Dire S&P 500 Warning for 2025
