The Week in the Markets
Bad week for major indices, all of which closed lower. Despite a gradual decline throughout the week, the main driver was Friday’s employment report, which surprised to the upside (strong economy). This has led to expectations of further delays in rate cuts, with the first cut now expected in July.
As a result, small caps were the week’s worst performers, notably underperforming their large-cap peers for the fifth time in the past six weeks. That said, it hasn’t been a good start to the year for the “Magnificent 7” either, as this week’s declines (NVIDIA -5.93% and Tesla -3.83%) have already pushed them into negative territory for 2025.
At the sector level, the only bright spots so far this year are Healthcare (mainly medical instruments and healthcare plans stocks) and Energy. Commodities were the big winners on Friday after strong labor market data reinforced the notion that the economy still has momentum (also supported by other macro indicators during the week, such as ISM). Additionally, several indicators this week suggest that inflation will remain elevated longer than the FED initially expected, bolstering the view that there may only be one rate cut this year (as per the market’s current forecast).
The VIX was the best performer of the week, reflecting the continued high volatility that characterized 2024. Alongside the fear of further declines, there was significant noise around tariffs this week—initially rumors of softer measures (indexes up Monday), followed by denials of those claims (indexes down).
Other big winners this week were Treasury yields, which rose sharply, largely due to Friday’s employment data, though they had already been climbing since Tuesday on ISM data and the FED minutes. Similarly, both the dollar and gold posted notable gains (in relative terms compared to their usual movements).
On the flip side, the euro struggled (along as the majority of currencies vs dollar). Given Europe’s macro situation, it seems highly likely that, despite this week’s uptick in inflation data, the ECB will cut rates at its January 30 meeting.
It was also a bad week for Bitcoin, the broader crypto market, and emerging markets. Most emerging market currencies—except the Russian ruble, supported by commodities—have been falling sharply against the dollar this start of the year.
(We are working on a dedicated one-pager to share weekly information on 27 currencies and their respective indices, which we hope to roll out next week.)
Highlights of the week
US Employment Data
The U.S. added 256k jobs in December 2024, the highest in nine months and well above expectations of 164k.
- Healthcare +46,000, Government +33,000, Social assistance +23,000, Retail +43,000, Manufacturing -13,000
For 2024 overall, payrolls grew by 2.2 million jobs, averaging 186,000 monthly, down from 3 million (251,000/month) in 2023, reflecting a strong yet cooling labor market.
- Wage growth remained moderate, with average hourly earnings rising 0.3% in December and 3.9% YoY, slightly below expectations.
- The unemployment rate fell to 4.1% (vs. 4.2% forecast) due to a surprising 478,000 job increase in the household survey.
The direct effect of this (in addition to what was mentioned in the initial summary) is the reduced expectations for rate cuts. If the economy is firing on all cylinders (as these numbers suggest) and inflation is ticking up slightly, the FED has more than enough justification to hold off on cutting rates.
US ISM Services (Prices Paid)
The data published this week shows that prices paid by purchasing managers have reached a 22-month high. This increase in prices suggests inflationary pressures are building. And it is quite likely that we will be surprised with higher-than-expected CPIs.
This is another argument to think (as the market is doing) that the FED will not make further rate cuts in the short term. In fact, when this data was published, the S&P dropped more than 100 points.
Europe CPI
Annual inflation in the Eurozone reached 2.4% in December 2024, matching expectations and driven by base effects.
Energy prices rose slightly (0.1%) for the first time since July, while inflation in services accelerated (4%).
In contrast, inflation remained stable for food, alcohol, and tobacco (2.7%) and declined for non-energy industrial goods (0.5%).
Core inflation held steady at 2.7%.
Source: Bloomberg
Germany CPI
Among major economies, inflation increased in Germany, France, and Spain but decreased in Italy.
In Germany, CPI inflation just jumped from 2.2% to 2.8% in December. It rises 0.4% MoM, compared to the expected 0.3% (previous -0.2%)
Source: Bloomberg
United Kingdom
- The 10-year gilt yield hit 4.8%, its highest level since August 2008, driven by rising global yields and mounting concerns over UK debt levels and the Labour government’s ability to implement its budget plans.
- The pound is at a 15-month low.
Some interesting Data about markets this week
Coming Earnings Season (January 2025)
So far this year, it is very clear who the main beneficiaries are of interest rates not decreasing (because the economy is performing well) versus the main ones harmed by the fact that rate cuts are now only expected in 2025.
Another non-determinative but still significant piece of data about the current market situation is that the sales-to-purchases ratio shows that insiders are selling stock at the highest level in two years.
