As we look at the day’s market outlook, the key question is: Why attempt a soft landing when the economy seems to be cruising smoothly?
The latest US payrolls report suggests the economy remains resilient, with the labor market continuing to show strength and inflation easing slowly. The upbeat data could prompt the Atlanta Fed to revise its GDP Now estimate upwards, currently pegged at a robust 2.7%.
In light of these strong figures, many market participants may begin questioning the Federal Reserve’s decision to ease monetary policy. A core consumer price reading above 0.2% on Wednesday could lead futures traders to reassess expectations, with some potentially revising their forecasts of any interest rate cuts this year.
Despite these market dynamics, the Treasury market is becoming more concerned about a potential rate hike instead. There are growing worries that President-elect Donald Trump’s policies, including universal tariffs, tax cuts, and mass deportations, could increase inflationary pressures. In addition, the latest data shows China’s massive $105 billion trade surplus with the US in December, which fuels arguments for implementing significant tariffs.
As a result, US Treasury yields have been rising steadily, with the 10-year yield now approaching the 5% mark. This is beginning to have a significant impact on the pricing of corporate earnings and the attractiveness of risk-free debt, making assets like equities, cash, and commodities seem less appealing.
These rising yields are also contributing to a stronger US dollar, which has seen increasing pressure on Asian currencies. Central banks across Asia have had to take action to stabilize their currencies, with the People’s Bank of China stepping up efforts to support the yuan, including raising the cap on what companies can borrow abroad.
In Europe, the mood is cautious, with stock futures indicating a slight dip. Asian markets are also in for a turbulent day, as US bond yields surged following a positive US employment report, causing concerns about higher borrowing costs and inflation. With the S&P 500 recently hitting its lowest point since November, many are wondering if the climb in long-term yields will significantly dampen investor sentiment, particularly toward riskier assets like stocks.
Meanwhile, trade data from China is expected to attract attention, with export growth likely accelerating in December. Economists will closely analyze December’s import figures to gauge the strength of domestic demand and assess the success of Beijing’s stimulus measures. Alongside trade figures, other top-tier indicators this week include retail sales, industrial production, and GDP data for the fourth quarter, which could provide further insight into the economic outlook.
With input from Reuters.
