It was perhaps one of the biggest and most important trading theses for investors as we enter 2024, contributing to a largely bullish view that helped propel U.S. large-cap and technology stock indexes to new all-time highs in June: the idea that a lower interest Rates are on their way this year.
May’s jobs report put an unexpected twist on that idea: It shocked traders and economists with how much more room the labor market has to offer, while complicating where policymakers should go from here. Not only did the U.S. economy create 272,000 new jobs, or 82,000 more than average economists forecast, but average hourly wages rose 4.1% over the past 12 months, a worrying sign for inflation. This happened despite other recent data appearing to indicate an economic slowdown in the US.
On Friday, top executives, economists and traders began publicly expressing doubts that the U.S. central bank could cut rates even once this year, a dramatic reversal from expectations in January and late December by as much as six or seven quarter points reductions. Treasury yields rose for the first time in seven sessions, pushing the ICE US Dollar Index DXY up 0.8%. Meanwhile, stock investors dithered over how to interpret May’s strong job growth, sending all three major indexes DJIA SPX COMP to a lower close on the day.
Pointing to the 2.1% weekly decline seen Friday in the small-cap Russell 2000 index RUT, Kevin Rendino, chairman and chief executive of 180 Degree Capital in Montclair, N.J., said the S&P 500 was down 1 this week .3% increased. and not far from Wednesday’s record high of 5,354.03 “doesn’t represent the carnage that lies beneath the largest cap stocks.”
“This week, as the S&P 500 hit new highs, there were more than 1,000 stocks that hit new lows,” Rendino wrote in an email to MarketWatch. The majority of stocks “have suffered in recent weeks as economic indicators have shown a weakening of the economy,” he said. Investors fear a slowdown if the data is weak, but are “panic” that the Fed will not cut rates if the data is good, as was the case on Friday.
Meanwhile, interest rate swaps known as OIS have completely priced out the likelihood of a Fed rate cut in December by a quarter point, according to Bloomberg News. Fed-funds futures traders were holding on to a 45% chance of just a one-quarter-point cut in September, and a probability of possibly two rate cuts before the end of the year. And on Main Street, a more pessimistic view emerged: Nearly four in 10 small business owners are preparing for rate hikes this year, a sharp reversal from three months ago, and more than half now believe the economy is heading toward stagflation. says Andrew Crapuchettes, labor market expert and CEO of Idaho-based RedBalloon, which connects companies with job seekers.
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Friday’s jobs data sparked an aggressive sell-off in U.S. government debt, sending the 1-year T-bill yield BX:TMUBMUSD01Y as high as 5.19%, one of the highest levels of the year. Yields on the 2-year BX:TMUBMUSD02Y and 10-year Treasury notes BX:TMUBMUSD10Y each rose about 15 basis points to close at one-week highs.
Although the S&P 500 and Nasdaq Composite ended lower on Friday, they still managed to secure weekly gains of 1.3% and 2.4%, respectively. They pushed their way toward records on Wednesday, even as expectations for six or seven Fed rate cuts have faded since the start of the year. One reason is an increasingly concentrated market, with a handful of big names accounting for a large share of market profits.
Also see: A few stocks drive most of the market gains. This is why investors shouldn’t worry too much.
“At the beginning of the year, the arguments for rate cuts were based on the hope that inflation and job growth would cool, and so far neither has materialized,” said Jeffrey Cleveland, managing director and chief economist at Payden & Rygel, a Los Angeles Angeles Times. Angeles-based investment management firm overseeing $161.7 billion in assets. “It’s almost as if the great expectations at the beginning of the year came from a place of hope – a future that didn’t materialize. The arguments for cuts have evaporated: there is currently no convincing argument for cuts.”
If the economy continues to grow and a recession is avoided, “stocks will continue to rise and reach record highs over the next six to 12 months,” Cleveland said by phone Friday. “Stocks tend to rise until the US business cycle ends, and May’s wage gains tell me there is still more room for the business cycle to move forward.” And if the Fed doesn’t cut rates because inflation remains higher, “our view is that it might not be such a bad environment to stay in T-bills.”
Investors and traders began gradually rolling back expectations for Fed rate cuts months ago after inflation turned warmer than expected in the first quarter and concerns grew that interest rates could hit a 23-year high of 5.25%. 5.5% might not be enough. Government bond yields reached their highest closing level in 2024 in April, with 10- and 30-year yields reaching 4.71% and 4.82% respectively.
Over the past two weeks, a stream of weaker-than-expected data has given new hope to the idea that the labor market and economy could still cool enough to justify interest rate cuts.
That data includes a slowdown in private sector hiring; construction and manufacturing-related data that fell below estimates; and the smallest increase of the year in the monthly core value of the Federal Reserve’s preferred inflation measure.
In addition, the Bank of Canada and the European Central Bank cut rates on Wednesday and Thursday, signaling what many hoped would be a global rate-cutting cycle that would eventually include the Fed.
Read: The ECB is ahead of the Fed to implement its first interest rate cut. Is now a good time to invest in European ETFs?
May’s unexpectedly good jobs report is not good news for the Fed and “should extinguish any hope of a rate cut this year,” said Sean Snaith, director of the Orlando-based Institute for Economic Forecasting at the University of Central Florida.
