Friday’s jobs report delivered perhaps the perfect definition of “mixed” results. The much better than expected 256K jobs added was good for the U.S. macroeconomic picture because it helps ensure that recession isn’t on the radar, but negative for the financial markets because it probably means the Fed will be able to cut rates very little this year. The larger implication is for inflation. The list of evidence pointing to higher price pressures, which includes CPI data, prices paid, job growth and others, is growing. We’re already seeing the financial markets responding accordingly. The S&P 500 and Nasdaq 100 are 4% and 5% off of their highs, respectively. The 10-year Treasury yield has soared to its highest level since October 2023. Gold is up more than $100 an ounce since mid-December. This could be another slow burn on a day-to-day basis, but it’s clearly possible that we may be in the early stages of a broader pullback for both equities and fixed income.
Another potential downside catalyst comes in roughly two weeks when the Bank of Japan meets. They punted on a rate hike back in December and it may have been the wrong move. Since then, the inflation data has worsened and the yen has weakened substantially versus the dollar. The government is already talking intervention again and may be forced to hike this month whether they’re ready to or not. I think part of the reason why we’re seeing yields moving higher here is that Japan is selling Treasuries in order to fund a potential yen purchase. Whether that’s true or not, Japan looks like it is perhaps the largest potential volatility trigger for the remainder of January.
The second Trump inauguration happens in a little over a week and that will start the clock officially for concrete policy implementations. For now, it’s mostly been rumor and rhetoric, but we could begin seeing official policy on things, such as tariffs and immigration, yet this month. Foreign trade policy will be the big one as it sets the tone for inflation and the potential for global recession in the future. Investors may have entered 2025 anticipating further gains in U.S. stocks, but the potential road bumps look like they could arrive early and often.
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