S&P 500 set for worst day since ‘post-Fed tantrum’

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Stocks got hammered and bond yields climbed alongside the U.S. dollar, with traders slashing their bets for United States Federal Reserve rate cuts this year after a blowout jobs report.

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Equities erased their 2025 advance, with the S&P 500 set for its worst rout since Dec. 18 — when the Fed roiled markets after forecasting fewer rate reductions in 2025. Riskier corners of Wall Street were knocked down, with small caps in “correction” territory after a plunge of about 10 per cent from previous highs. A slide in Treasuries briefly drove 30-year yields above five per cent. Swaps are now pricing in only about 30 basis points of Fed cuts this year.

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The U.S. economy in December added the most jobs since March and the unemployment rate unexpectedly fell, capping a surprisingly strong year. Separate data fuelled concerns about stubborn price pressures, with consumers’ longer-term inflation expectations rising to the highest level since 2008. And a surge in oil only added to anxiety on that front.

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Neil Birrell at Premier Miton Investors says that any hope of a quiet start to the year has well and truly disappeared now.

“Good news for the strength of the economy and bad news for those hoping for interest-rate cuts, as inflation will stay bang at the top of the Fed’s agenda now,” he noted. “The jump in bond yields looks set to continue, which is bad news for equities. Could a five per cent yield on the 10-year Treasury really be hit?”

The S&P 500 fell 1.3 per cent, hovering near its 100-day moving average. The Nasdaq 100 sank 1.2 per cent. The Dow Jones Industrial Average dropped 1.4 per cent. A gauge of the “Magnificent Seven” megacaps fell 0.7 per cent. The Russell 2000 index of small firms lost 2.1 per cent. Wall Street’s favourite volatility gauge — the VIX — surged to around 19.

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The yield on 10-year Treasuries advanced eight basis points to 4.77 per cent. The Bloomberg Dollar Spot Index rose 0.4 per cent.

“Investors may want to brace themselves for more volatility as the market recalibrates expectations for fewer cuts,” said Gina Bolvin at Bolvin Wealth Management Group.

Following Friday’s solid jobs data, economists at some big banks revised their forecasts for additional Fed rate cuts.

Bank of America Corp., which previously expected two quarter-point reductions this year, no longer expects any, and said there’s a risk the next move is a hike. Citigroup Inc. — whose rate-cut outlook is among Wall Street’s most hopeful — still looks for five quarter-point cuts, but says they’ll start in May. Goldman Sachs Group Inc. sees two cuts this year versus three.

“The Fed can be very comfortable staying put in January and will need some meaningful downside inflation surprises or reversals in upcoming jobs reports to wake them from rate slumber in March,” said Seema Shah at Principal Asset Management. “For global bonds, the strength of the US jobs report just adds to their challenges. The peak for yields has not yet been reached.”

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Treasury yields have been climbing since the Fed in September kicked off its rate cutting cycle. A resilient U.S. economy fueled the moves further, leaving the 10-year yield more than 100 basis points higher than it was before the debut rate reduction. All that has forced bond investors to contend with the possibility that the benchmark yield could soon return to five per cent — a level that has been breached only a handful of times over the past decade.

The move higher in Treasury yields over the past month has largely been driven by real rates — suggesting that higher growth expectations have been the dominant driver behind the selloff, according to Gennadiy Goldberg at TD Securities.

“So much for the idea of equity investors rooting for a stronger economy, at least for today,” said Steve Sosnick at Interactive Brokers. “Stock traders are once again more concerned about the potential for monetary accommodation rather than the type of robust economy that can improve corporate fundamentals.”

For investors hoping equity markets would broaden from the megacap tech names, the latest data didn’t do them any favors, according to Lara Castleton at Janus Henderson Investors.

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“People are now going to get concerned that the Fed will not be able to cut at all, pressure is building on the Fed,” said Guy Stear at the Amundi Investment Institute. “Yields will continue to rise towards five per cent in the next couple of months, putting pressure on equity markets unless you get a very strong first-quarter earnings season.”

To Bret Kenwell at eToro, while the market may not love the latest jobs data, there are a lot of worse things than a strong labor market.

“Without a strong foundation in the labor market, the whole thing falls apart. Investors need to keep that in mind — even if that means rate-cut expectations take a step back,” Kenwell said.

Indeed, it looks like we are back in a world where good news is bad news, said Scott Helfstein at Global X. But that seems shortsighted, he noted.

“We believe that companies can deliver on lofty earnings expectations this year powered by automation technologies like AI and deregulation, and that will drive equities rather than the Fed,” he said.

The latest data raises the stakes for inflation gauges to be released next week. December consumer price index data to be released Jan. 15 are forecast to show a third straight month of acceleration, to a rate of 2.9 per cent.

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“The surprisingly strong jobs report certainly isn’t going to make the Fed less hawkish,” said Ellen Zentner at Morgan Stanley Wealth Management. “All eyes will now turn to next week’s inflation data, but even a downside surprise in those numbers probably won’t be enough to get the Fed to cut rates any time soon.”

Corporate highlights:

• Tesla Inc. refreshed its best-selling Model Y, applying a design element of the polarizing Cybertruck to its high-volume sport utility vehicle.
• Hewlett Packard Enterprise Co. won a deal worth more than US$1 billion to provide Elon Musk’s X social network with servers optimized for artificial intelligence work.
• Nvidia Corp. criticized new chip export restrictions that are expected to be announced soon, saying the White House was trying to undercut the incoming Trump administration by imposing last-minute rules.
• Delta Air Lines Inc.’s profit beat Wall Street’s estimates for the final months of 2024, buoyed by gains in both the U.S. market and overseas. The company doesn’t expect the momentum to slow in the new year.
• Walgreens Boots Alliance Inc. reported quarterly sales that surpassed Wall Street’s expectations, spurring the shares and easing pressure on the drugstore chain as it mulls strategic options including a sale.
• Constellation Energy Corp. agreed to acquire closely held Calpine Corp. for US$16.4 billion in a deal that will create the largest fleet of U.S. power stations.
• The Walt Disney Co., Fox Corp. and Warner Bros. Discovery Inc. scrapped plans to create a joint sports streaming service just days after settling a lawsuit brought against the three companies alleging the platform would squelch competition.
• Chip-design company Synopsys Inc. won conditional approval from the European Union’s merger watchdog for its planned $34 billion buyout of software developer Ansys Inc, after addressing the regulator’s fears over the deal.

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Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.3 per cent as of 2:59 p.m. New York time
• The Nasdaq 100 fell 1.2 per cent
• The Dow Jones Industrial Average fell 1.4 per cent
• The MSCI World Index fell 1.3 per cent
• Bloomberg Magnificent 7 Total Return Index fell 0.7 per cent
• The Russell 2000 Index fell 2.1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.5 per cent to US$1.0245
• The British pound fell 0.8 per cent to US$1.2210
• The Japanese yen rose 0.2 per cent to 157.88 per dollar

Cryptocurrencies

• Bitcoin rose 3.5 per cent to US$95,310.04
• Ether rose 2.7 per cent to US$3,295.27

Bonds

• The yield on 10-year Treasuries advanced eight basis points to 4.77 per cent
• Germany’s 10-year yield advanced three basis points to 2.59 per cent
• Britain’s 10-year yield advanced three basis points to 4.84 per cent

Commodities

• West Texas Intermediate crude rose 3.5 per cent to US$76.54 a barrel
• Spot gold rose 0.7 per cent to US$2,686.09 an ounce

This story was produced with the assistance of Bloomberg Automation.

—With assistance from Natalia Kniazhevich and Julien Ponthus.

Bloomberg.com

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