(Bloomberg) — Stocks retreated as traders geared up for Friday’s jobs report for clues on the pace Federal Reserve rate cuts over the next few months. Treasuries stabilized following a recent spike in longer-term yields.
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Wall Street refrained from making riskier bets, with the market set to close on Thursday in observance of a national day of mourning for former President Jimmy Carter. Options traders are betting the S&P 500 will move roughly 1.2% in either direction after the US employment data, based on the price of that day’s at-the-money straddles, according to Citigroup Inc. That would be the biggest implied move on a jobs day since September.
The government’s monthly employment is projected to show payrolls, including government positions, rose by 163,000 in December following a 227,000 increase in November. Fed Governor Christopher Waller said he believes inflation will continue to cool toward the central bank’s 2% target, prompting his support for additional interest-rate cuts this year. Data Wednesday showed US private-sector hiring and wage growth slowed.
“While further near-term strength in the labor market is likely to keep expectations around 1-2 cuts in 2025 for now, we continue to believe that inflation will continue to slowly trend down while employment stays in balance allowing the Fed to cut rates three times in 2025,” said Chris Senyek at Wolfe Research.
The S&P 500 dropped 0.4%. The Nasdaq 100 slid 0.5%. The Dow Jones Industrial Average fell 0.4%. The shares of IonQ Inc. and other companies linked to quantum computing tumbled after Nvidia Corp. Chief Executive Officer Jensen Huang said that “very useful” quantum computers are likely decades away. Shares of the giant chipmaker fluctuated on Wednesday.
The yield on 10-year Treasuries was little changed at 4.68%. The 20-year yield, a laggard on the US government debt curve since its re-introduction in 2020, topped 5%. UK markets tumbled, pushing bond yields to the highest in more than a decade. The Bloomberg Dollar Spot Index rose 0.4%.
“The rate increase is global in nature,” said Neil Dutta at Renaissance Macro Research, who cited similar moves in the UK, Germany, Japan. “Now, the US can handle 5% a lot better than these countries. In the US, the big tech sector could mean upside risks to US trend growth. The US is an energy producer, Europe is a big importer. Japan is another slow-growth country.”
There’s room for stocks to fall further as bond yields approach levels that have been painful for equities in recent years.
“Equity/bond yield correlations have turned negative again,” Goldman Sachs Group Inc. strategists including Christian Mueller-Glissmann wrote in a note, stressing that if yields keep going up without good economic data, it will hit equity markets. “With equities having been relatively resilient during the bond selloff, we think near-term correction risk is somewhat elevated in case of negative growth news.”
While the recent slide in stocks and bonds could worsen as traders fret over the prospect of higher inflation and interest rates, the decline is unlikely to reach the extremes seen in 2022 when markets weathered their worst year since the global financial crisis, according to Morgan Stanley’s Mike Wilson.
The bank’s chief US equity strategist expects a choppy first half of 2025 and an improved second part of the year, he said during an interview with Bloomberg Television on Wednesday. The difference between now and then is that the Federal Reserve in 2022 was aggressively raising interest rates at a pace that is unlikely going to be repeated in the foreseeable future.
There is not as much downside for rates today “but that doesn’t mean there couldn’t be 10% downside for many stocks if rates stay at this level,” Wilson noted.
“Historically, the most common driver of significant losses are recessions,” said Henry Allen at Deutsche Bank AG. “The huge plunges in 2020 and 2008 required an economic contraction, and the bursting of the dot-com bubble also happened amidst a slowdown that ended up in a recession in 2001. But right now, there’s no sign of a slowdown, and if anything, several leading indicators are looking increasingly positive.”
If economic growth stays robust and the Fed doesn’t start pivoting in a hawkish direction, it’s not implausible that elevated valuations continue for some time, Allen noted. However, if signs of a slowdown emerge or rate hikes move back on the table, the historic precedents show that equities are capable of a notable decline, even without a recession, he concluded.
There are five potential issuers looking to raise fresh capital in the US investment-grade primary market Wednesday, according to an informal survey of debt underwriters who declined to name the firms. The market’s $71 billion of issuance the first four business days of January is 35% of the way to high estimates of $200 billion for the month.
Corporate Highlights:
Albertsons Cos. raised its adjusted earnings outlook for the full year, a positive sign for the grocer seeking to pave a new path after its proposed deal with Kroger Co. fell apart.
Advanced Micro Devices Inc. was downgraded to reduce from buy at HSBC, which cited difficulty in competing with Nvidia Corp.
Merck & Co. was downgraded to hold from buy at Truist Securities, which cited growth concerns at the pharmaceutical company.
Palo Alto Networks Inc., a security software company, received a pair of analyst downgrades.
The US utilities sector was upgraded to overweight from market weight at RBC Capital Markets, which called the group the “top defensive sector.”
Key events this week:
China CPI, PPI, Thursday
Eurozone retail sales, Thursday
US state funeral and national day of mourning for former President Jimmy Carter is a federal holiday, Thursday
Japan household spending, leading index, Friday
US jobs report, consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.4% as of 10:22 a.m. New York time
The Nasdaq 100 fell 0.5%
The Dow Jones Industrial Average fell 0.4%
The Stoxx Europe 600 fell 0.6%
The MSCI World Index fell 0.6%
Currencies
The Bloomberg Dollar Spot Index rose 0.4%
The euro fell 0.3% to $1.0304
The British pound fell 1.1% to $1.2343
The Japanese yen fell 0.2% to 158.32 per dollar
Cryptocurrencies
Bitcoin fell 1.7% to $94,796.06
Ether fell 0.6% to $3,341.06
Bonds
The yield on 10-year Treasuries was little changed at 4.68%
Germany’s 10-year yield advanced five basis points to 2.53%
Britain’s 10-year yield advanced 10 basis points to 4.79%
Commodities
West Texas Intermediate crude fell 0.1% to $74.17 a barrel
Spot gold rose 0.6% to $2,663.55 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Andre Janse van Vuuren, Sujata Rao, Kit Rees, Joanna Ossinger and Rob Verdonck.
