Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

     Patricia Medina - Market Strategy Analyst

First and foremost, our thoughts and prayers go out to all those impacted by the ongoing fires in California. Last week ended on a positive note following a rough stretch to end 2024. Last Friday’s rally broke a five-session losing streak with the S&P 500 bottoming out right around the post-election low (~5,830). The index rallied into Friday's close ending the week right at its 50d moving average (~5,950). That rally was driven by better-than-expected ISM manufacturing PMI, Mike Johnson securing his role as House Speaker and building optimism ahead of this week’s Consumer Electronic Show in Las Vegas.

The week got off to a positive start with tech/Washington optimism once again the primary drivers. A couple of positive corporate updates in tech added to the strength while there were reports of support for “one big beautiful bill” in Congress. Ahead of the open it was also reported that the administration was considering a more targeted approach to tariffs. President-elect Trump quickly refuted those claims which along with a move higher in Treasury yields did take some of the wind out of the sails by the end of the day.

Jensen Huang’s keynote Monday night included the unveiling of its new chip, a desktop powered by Blackwell and he also shed some light on how AI will shape the world going forward with its Cosmos platform developing physical AI systems for robots and self-driving. This was all impressive enough to send the stock to a new all-time high at the open on Tuesday briefly overtaking Apple as the largest market capitalization company and pulling the overall tape higher with it. There was a bit of a sell the news response after the open but there was a significant downside reversal with the S&P 500 breaking back below its 50d ma again after an increase in the JOLTS job openings and a big jump in the prices component of its ISM Services PMI which sent Treasury yields higher again. The S&P 500 traded down just under 2% from its intra-day highs to end the session lower by >1%,  while Nvidia fell ~8.5% from its high.

On Wednesday, global yields remained at the top of trader watch panels. A big jump in UK Gilt yields following a weak auction ahead of the US open sent futures lower but a mix of a weaker ADP jobs survey, Fed commentary which had some dovish undertones and the fact that both the 10/30yr US auction on Tues/Wednesday went off without a hitch helped yields pullback slightly. With US markets closed on Thursday it was a choppy session with markets seemingly in a holding pattern ahead of this morning’s jobs report.

The jobs report came much stronger than expected with the unemployment rate falling to 4.1%. As you’re probably already aware Treasuries once again came for sale with both 10/30yr yields taking out their 2024 highs. With the focus almost solely on bond yields at the moment the good news for the economy was not translated that way for equity markets which fell sharply. The S&P 500  closed down 1.5% with broad based weakness (~6:1 dec:adv), closing just below the aforementioned lows. For the week the index was down just under 2%. Small caps underperformed with the Russell 2k falling 3.4%. Last week I said, “I do expect 2025 to be a more volatile year with investors reacting to Washington policy, Tweets, geopolitical uncertainty, potential growth and inflation scares and lingering questions around AI”. We got a little bit of all of that this week. 

For the week 8 of 11 sectors closed lower. There were some signs of rotation beneath the surface. Energy was the best performing sector up ~1% driven by the strength in oil. Healthcare was up for the second consecutive week helped by some optimism ahead of the JPM Healthcare conference next week. Materials also ended the week slightly higher.

On the downside the move higher in yields weighed on REITs which were off >4%. Info tech ended the week down >3% despite some positive news flow. The more speculative tech stocks were under pressure as some of the liquidity driven strength unwound. The quantum computing stocks got hit hard after Jensen Huang warned the technology was still years away. Ahead of the start of earnings season next week financials were under pressure led by P/E firms and insurance companies. Within staples food and beverage stocks sold off after some disappointing earnings, but there was outperformance in the major retailers (WMT, TGT, COST) after today’s jobs report. 

There was a flurry of M&A activity this week capped off by Constellation Energy’s deal to by Calpine for ~$30B in cash and stock. From a market reaction perspective I would note that many of the buyers have traded higher post announcement. If markets are rewarding companies for that investment that momentum will continue to pick up though funding costs moving higher are a bit of a headwind. 

Global Markets - it was a mixed week around the globe. 

Commodities - Despite the USD strength commodities moved higher pretty much across the board this week. 

After a failed attempt to reclaim the 50d the index closed right at the low end of the recent range. The index closed right at the 100d ma and the bottom end of the recent range. There is a small head and shoulder top if the neckline breaks the measured move is down to ~5,550 which is just above the 200d. The bounce earlier this week has kept the market from getting oversold. Keep in mind next week is options expiration which can add to the momentum.

Last week - It’s been a choppy couple weeks with most of the damage in December done on the day of the Fed meeting at least for the market cap weighted index. This week the index retested the post-election lows and traded within 1% of its 100d ma just below 5,800. It did bounce closing right at its 50d ma today ~5,940. At this point the index really has been consolidating in a 300pt range just above the pre-election highs and we’re right in the middle of that. A break below the low end of that range would target a test of the 200d ma which is ~5,560. Throughout all of 2024 the index only got within 2% of that level once at the lows in August. The last time it was properly tested was in late 2023. 

The equal weight index closed just below recent lows and within 1% of its 200d. A break below targets a move between 6,600 - 6,800.

Economic data - The primary data this week was related to the labor market and pretty much across the board the data continues to point to a resilient labor market. Before we dive into that, the first piece of economic data that impacted markets this week was the ISM Services PMI which came in above expectations. Within that report the underlying metrics were mixed new orders moved up modestly while employment ticked down. However, the prices component (red line in Chart below) jumped to 64.4 from 58.8 the first time its moved above 60 since last January, sparking some inflation concerns.

The JOLTS job opening came in well ahead of expectations increasing to ~8.1ml which is about 10% above the trough in September just below 7.4ml. The report also highlighted those separations also remained very low (see Chart 1). The ADP survey came in bit below expectations, but the underlying metrics were similar to what was seen in today’s NFP report which came in much stronger. Healthcare was a big driver of job gains while manufacturing hiring declined. The focal point for this survey is often the pay data and wages moderated falling to 4.6% for job stayers and 7.1% for changes from 4.8% and 7.2%, last month. Before I discuss today’s jobs report in more detail, I’d also note that initial claims fell to 201k. Continuing claims did increase but also was ahead of expectations. 

This week’s main event was today’s jobs report. Headline nonfarm payrolls came in well ahead of estimates at 256k (vs. 153k cons.) with strong private sector hiring on the services side of the economy. There was only a very minor negative revision to the previous two months. Hiring was driven by healthcare, a rebound in retail and leisure and hospitality. Similar to the ADP report there were declines of 8k jobs in the good-producing sectors. After the jobs scare in August reports since have been very strong though we could still be working through some of the impacts of storms. The trailing six-month average of job gains ended the year ~165k down from 213k at the start of the year but this was the first month that moving average has increased since May. 

Over the last year we’ve talked about the divergence between the household and establishment survey but today that household number was also very strong up 478k after a decline of 273k last month (see Chart). This pushed the unemployment rate down to 4.1% from 4.2% while the labor force participation rate held steady at 62.5%. The wages data pointed to some moderation up 0.3% m/m and 3.9% y/y both down a tenth of a percent from last month. This is a very strong report and a reflection of some of the optimism that we were seeing in the survey data post-election. While I understand the market response that wage number is not suggesting that the employment situation is driving inflation at this point. Markets continue to further price out rate cuts with only 1-2 cuts with futures suggesting that wouldn’t happen until the back half of the year.

The other notable thing today was the U of Mich Sentiment survey. Overall sentiment ticked slightly lower however, there were very big increases in inflation expectations and inflation uncertainty (see Chart). The 1 and 5yr inflation expectations which both increased to 3.3% from 2.8% and 3%, respectively. This is likely due to the expectation for tariffs but it is something that will get the attention of Fed officials.

The move higher in Treasury yields has been a headwind for equity markets for the last month and change. Since the Federal Reserve began cutting interest rates in September the yield on the 10yr has moved up by >100bps which is very abnormal behavior which was highlighted beautifully in the chart created by Apollo’s Torston Slok. 

Part of this can be explained by the fact that the Federal Reserve began this campaign while the economy was still strong while it has historically been behind the curve, cutting only once the economy was already in or about to embark upon a recession. The reduction in recession odds is partially behind this move but there has also been an increase in the term premia, the excess rate investors require to hold longer dated paper, as concerns with growing fiscal spending deficits have been at the forefront. The 10-yr breakeven inflation rate has also moved up a bit but has remained well contained below 2.5%. It is just now starting to accelerate with the move higher in commodities particularly oil prices which are up >10% in the last month. Concerns of re-accelerating inflation are starting to bubble up just in time for next week’s inflation report. There may also be some thought that the fires and subsequent rebuild could add to inflationary pressures.  It will be especially difficult to break the Washington narrative. In fact, Elon Musk just seemed to walk back the DOGE estimates of cutting $2T calling that a best-case outcome and seemed to suggest that $1T was more realistic.

This week we’ve heard from quite a few Fed officials and the opinions have varied widely with Waller and Goolsbee suggesting further cuts are still in the cards while Bowman and Schmid both suggested that rates are near-neutral. One other note on Fed staffing Michael Barr, one of the architects of post-2023 regulatory proposal, stepped down as Vice Chair of Supervision on Monday as he found himself in President Trump’s crosshairs but will remain in his seat on the Board of Governors. This is viewed as a win for banks. President Trump will now be forced to choose his replacement from someone already on the board.  

Yields were up >10bps across the curve this week. Up until today the recent move higher has happened at the long-end but for the first time the 2yr yield, which is more sensitive to Fed policy, was the weakest. The 30yr yield broke above its 2023 high on Monday and the 10yr has followed moved higher. The 2-10 spread has been moving higher before backing of today. 

US IG OAS was flat at 83bps as most buckets were unchanged. The benchmark spread is further approaching its 1yr low.  Most IG corporate sector spreads were flat. Media and Telecommunications added 2bps yielding 5.7% outpacing the benchmark in both instances. Both sectors posted negative total return <-1% a bit higher than the benchmark. Meanwhile, Transportation and Leisure OAS were flat yielding 5.3% rangebound to the benchmark return. 

US HY OAS was flat at 282bps with flat or negligible moves on the HY buckets OAS. The benchmark is tight at only 22bps above its 1yr low.  HY corporate spreads mostly compressed across sectors. Steel and Leisure tightened 15-18bps resulting in 7.3% and 6.1% yields respectively, both slightly behind the benchmark. This led to positive total returns of 0.25% on average. Entertainment and Auto & Auto Parts OAS rose 20-40bps with mixed total returns. 

EM HY spread pulled back -4bps to 348bps while EU HY widened +5bps above 350bps. EM HY spread to US HY compressed below 70bps which is now lower than EU HY to US HY differential after increasing and breaking above 70bps on the week. Both differentials are close to their 1yr low levels.  

Active week with issuance from cyclical and defensive players alike. The cruise sector priced near $2BN in debt with a high 6% handle. Automakers were also active pricing mid to long term maturities. Mining and Energy companies priced over $1BN in debt.  Insurance companies announced issuance in the 5-10yr tenors extending the sector participation for a second week. 

The ICE Bank of America (ICE BofA) total returns for indices covering the U.S. and global bond markets were mostly negative with corporate logging positive returns. On corporates, EM HY posted the highest positive level at +0.25% followed by US HY. US IG declined the most followed by EU HY. On sovereigns, U.S T-Bill returns were fractionally positive, the rest were negative. MBS and ABS were mixed. 

Next week is set to be a very big week with major indices hovering around key levels, the VIX moving higher and options expiration on Friday. The key economic data in the US includes inflation and retail sales. Global data includes China trade/GDP and UK/Japan inflation. Speaking of there is a 10yr Gilt auction which might get some attention after this week's trading. US auction are all bills. Earnings season gets underway on Wednesday with financials leading out. The JPM Healthcare and the ICR conferences both begin next week. The confirmation hearings in Washington begin as well. Have great Wildcard Weekend!

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