(Bloomberg) — Stocks were hit hard and bond yields rose along with the dollar, with traders lowering their bets on Federal Reserve rate cuts this year after a booming jobs report.
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Stocks have erased their 2025 gains, with the S&P 500 suffering its worst rout since December 18 – when the Fed roiled markets by being cautious about how quickly it can continue cutting rates. The riskier parts of Wall Street sold off, with small caps down about 10% from previous highs. Due to a fall in government bonds, the 30-year interest rate briefly rose above 5%. Swaps are now pricing in less than 30 basis points of Fed cuts this year.
The US economy added the most jobs since March in December and the unemployment rate fell unexpectedly, capping off a surprisingly strong year. Separate data fueled concerns about persistent price pressures, with consumers’ longer-term inflation expectations rising to their highest level since 2008. And a rise in oil prices only increased concerns on that front.
Neil Birrell of Premier Miton Investors says any hopes of a quiet start to the year are now gone.
“Good news for the strength of the economy and bad news for those hoping for rate cuts as inflation will now remain at the top of the Fed’s agenda,” he noted. “It looks like the rise in bond yields will continue, which is bad news for equities. Would a 5% return on the 10-year government bond really be achievable?”
At Interactive Brokers, Steve Sosnick says stock traders have once again revealed their “liquidity addiction.”
“Stock traders are once again more concerned about the potential for monetary easing than about the kind of robust economy that can improve business fundamentals.”
The S&P 500 fell 1.5% and hovered near its 100-day moving average. The Nasdaq 100 fell 1.6%. The Dow Jones Industrial Average fell 1.6%. A gauge for the “Magnificent Seven” megacaps fell 1.2%. The Russell 2000 index of small companies lost 2.2%. Wall Street’s favorite volatility gauge – the VIX – rose to around 20.
The yield on ten-year government bonds rose by seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.
Following Friday’s solid jobs data, economists at some major banks have revised their expectations for additional Fed rate cuts.
Bank of America Corp., which expected a two-quarter-point cut earlier this year, doesn’t expect any more cuts and said there is a risk the next step will be a rate hike. Citigroup Inc. — whose rate cut prospects are among Wall Street’s most hopeful — still expects a five-quarter-point rate cut but says they will begin in May. Goldman Sachs Group Inc. will see two cuts this year instead of three.