Fed fears inflation and Trump

Welcome back to SovereignBeat!

• Bombshell jobs report numbers

• Fed Wary of Inflation, markets price in for only 1 Cut in 2025

• Eurozone Inflation Climbs Again in December

• Japan Will Likely to Delay Rate Hike to April

• S&P Falls for 4th Time in 5 Weeks

• Brent Hits $80 After U.S. Sanctions Russian Oil

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: The labor market demonstrated continued strength in December, with 256,000 jobs added—exceeding economists' projections by around 100,000. This brought the year’s monthly average job growth to 186,000. December's unemployment rate dipped slightly to 4.1% from 4.2% in November and wages grew 3.9%. Following the stronger-than-expected employment data, the yield on the 10-year U.S. Treasury note surged to a 14-month high, reaching 4.79% on Friday morning before settling at 4.76%. This sharp increase reflects heightened market expectations of a more hawkish monetary policy, with projections now factoring in just one rate cut in 2025.

• Adding the markets’ fears, Federal Reserve Governor Michelle Bowman highlighted in a Thursday speech that inflation remains "uncomfortably above" the Fed's 2% long-term target. While acknowledging progress made in 2023, she warned of persistent upside risks to inflation. Similarly, minutes from the Fed’s December policy meeting, released on Wednesday, revealed that most officials were comfortable keeping rates steady in January, with "almost all participants" noting heightened risks to the inflation outlook.

• A Consumer Price Index report scheduled for release on Wednesday by the Bureau of Labor Statistics will show whether a recent trend of slightly hotter-than-expected inflation extended into December. Last month’s CPI report showed an annual rate of 2.7% in November, up from 2.6% the previous month—a further indication of recently uneven progress in bringing inflation closer to the Fed’s 2.0% long-term target.

• EU: A series of data points provided a mixed view of the eurozone economy. Annual inflation rose to 2.4% in December, up from 2.2% in November, driven by higher energy and services costs. The core inflation rate, excluding energy, food, alcohol, and tobacco, remained steady at 2.7%. Retail sales showed minimal growth in November after declining in October, while the unemployment rate held at a record low of 6.3%. Despite these developments, the European Central Bank (ECB) stated in its latest Economic Bulletin that the disinflation process remains on track, emphasizing that most measures of underlying inflation indicate a return to the ECB’s 2% medium-term target on a sustained basis.

• UK: Yields on the government bonds surged as concerns over borrowing levels and economic weakness intensified. Last week, the 10-year gilt yield hit 4.8%, its highest since August 2008, while the 30-year gilt rose to over 5.45%, a level not seen since 1998. In response to a sell-off in both the pound and UK government bonds, the Treasury sought to reassure markets of its commitment to fiscal rules. The broader rise in bond yields was partly driven by apprehension over President-elect Donald Trump’s policies and a more hawkish U.S. interest rate outlook. Investors worry about the Labour government’s ability to manage debt levels while implementing its budget plans further pressured gilt yields. Meanwhile, The Times of London reported that Chancellor Rachel Reeves urged Cabinet colleagues to propose ideas for boosting economic growth.

• The pound also declined this week, sliding to the 1.22 USD mark. Notably, GBP/USD had briefly traded above 1.34 in late September. Recent selling pressure has pushed the currency pair toward critical psychological levels, a move that might have been avoided had the Bank of England adopted a more dovish stance in December.

• Japan: The Bank of Japan’s Governor Kazuo Ueda reiterated that rates will only rise if economic and price conditions continue to improve. However, recent remarks have underscored concerns about U.S. policies, including tariffs and fiscal measures, making a January rate hike unlikely. Many investors now expect any policy rate increase to be delayed until March or April. Adding to this cautious outlook, Japan’s real (inflation-adjusted) wage growth—a key BoJ metric for consumer purchasing power—fell 0.3% year-on-year in November, marking a fourth consecutive month of declines.

Equity Markets

• US: Equities fell during a holiday-shortened week, with markets closed Thursday to honor former President Jimmy Carter. Small-cap stocks underperformed large caps for the fifth time in six weeks, as the Russell 2000 Index entered correction territory Friday morning. The S&P 500, Nasdaq, and Dow all dropped over 1%, marking their second consecutive weekly losses amid investor concerns about a potential slowdown in interest rate cuts. The S&P 500 ended the week down more than 4% from its December 6 record high, logging its fourth loss in five weeks.

Commodities

• Oil: Oil prices rose for the third consecutive week with Brent closing near $80 on Friday, marking a gain of over 10% during that period. Prolonged cold weather across the Northern Hemisphere is set to drive up heating fuel consumption, while U.S. crude stockpiles declined for the seventh straight week, highlighting strong demand. Meanwhile, supply concerns grew as Russia’s seaborne oil exports fell to their lowest level since August 2023.

• Gold: Futures also climbed for the second straight week, reaching approximately $2,717, just 3% below the record high set two and a half months ago.

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