Weekly Wrap

The stock market closed with losses at the index level. Rising market rates were a big driving factor in this week's action, reflecting worries about stick inflation and that the Federal Reserve may maintain higher interest rates for an extended period.

The 10-yr yield surged 18 basis points this week to 4.78% and the 2-yr yield settled 12 basis points higher than last Friday to 4.40%. This price action was in response to this week's economic releases.

The reports includes a stronger-than-expected ISM Services PMI reading for December and a November JOLTS - Job Openings Report that showed a noticeable increase in job openings. The added wrinkle in the ISM Services PMI is that it also featured a notable pickup in the Prices Index (to 64.4% from 58.2%), which topped the 60.0% level for the first time since January 2024.

The data also included a below-consensus ADP Employment Change report for December (122,000; Briefing.com consensus 131,000), and an unexpected drop in weekly Initial Claims (201,000; Briefing.com consensus 218,000; prior 211,000).

The December employment report featured a 256,000 increase in nonfarm payrolls and a dip in the unemployment rate to 4.1% from 4.2%. There was also a notable jump in year-ahead and long-run inflation expectations in the preliminary January University of Michigan index of Consumer Sentiment.

Market participants also received the FOMC Minutes for the December 17-18 meeting, which echoed Fed Chair Powell's remarks in his press conference after the meeting. The minutes conveyed a belief that the Fed should hold off on another rate cut until it has more confidence in inflation returning to its 2% target and/or more concern about the labor market deteriorating in a more pronounced manner.

Many stocks participated in a broad retreat this week. The market-cap weighted S&P 500 dropped 1.9% and the equal-weighted S&P 500 dropped 1.7%. The Nasdaq Composite fell 2.3% and the Dow Jones Industrial Average closed 1.9% lower than last Friday. The S&P 500 briefly traded above its 50-day moving average this week before dropping back below that key level.

Only three S&P 500 sectors closed higher and eight closed lower than last Friday. The health care (+0.5%), energy (+0.9%), and materials (+0.1%) sectors closed higher while the rate-sensitive real estate sector logged the largest decline, dropping 4.1% from last week.

Monday:

The stock market started the session in rally-mode, but buying faded by the close. The S&P 500 and Nasdaq Composite benefitted from buying interest in the mega cap and chipmaker space, which also faded from initial levels.

NVIDIA (NVD), which outperformed ahead of CEO Jensen Huang's keynote address at the Consumer Electronics Show (CES) tonight at 6:30 p.m. PST (9:30 p.m. ET), traded up as much as 5.3% at its high.

NVIDIA's outperformance was also linked to AI enthusiasm after Foxconn reported a 15% yr/yr increase in record Q4 revenues. This enthusiasm was a driving factor in the initial move higher for the broader equity market, along with some technical support after the S&P 500 opened above its 50-day moving average (5,948) and maintained a posture above that level through the entire session.

Buying interest dissipated due to choppy action in Treasuries, and after President-elect Trump said in a Truth Social Post that it was wrong of the Washington Post to suggest his tariff policy would be pared back.

Reviewing Monday's economic data:

• Factory orders decreased 0.4% month-over-month in November (Briefing.com consensus -0.3%) following an upwardly revised 0.5% increase (from 0.2%) in October. Excluding transportation, factory orders rose 0.2% on the heels of a 0.2% increase in October. Shipments of manufactured goods edged 0.1% higher in November following a 0.2% decline in October.
  • The key takeaway from the report is that the weakness in factory orders was concentrated in the volatile transportation equipment space; otherwise, there was a modest pickup in order activity.
• December S&P Global US Services PMI 56.8 (prior 58.5) versus final reading of 56.1 for November. The dividing line between expansion and contraction is 50.0, and although the final December reading was revised down from the preliminary reading of 58.5, the final reading for December was above the final reading for November, indicating that the pace of expansion accelerated versus the prior month.

Tuesday:

The stock market initially traded higher, but gains faded quickly as participants responded to the economic releases at 10:00 ET. Treasury yields also shot higher as stocks declined in response to a stronger-than-expected ISM Services PMI reading for December and a November JOLTS - Job Openings Report that showed a noticeable increase in job openings.

The added wrinkle in the ISM Services PMI is that it also featured a notable pickup in the Prices Index (to 64.4% from 58.2%), which topped the 60.0% level for the first time since January 2024. The 10-yr yield was at 4.63% ahead of the data and settled at 4.68%, seven basis points higher than yesterday.

Losses in the major indices were fairly muted until the S&P 500 slid below its 50-day moving average (5,950), which drew in additional selling interest.

Reviewing Tuesday's economic data:

• November Trade Balance -$78.2 bln (Briefing.com consensus -$77.9 bln); Prior was revised to -$73.6 bln from -$73.8 bln
  • The key takeaway from the report is that the import surge likely reflects a bid to get ahead of President-elect Trump's tariff plans, meaning businesses might have more inventory than usual waiting to be utilized/sold that detracts from import demand in coming months (i.e., post-inauguration).
• December ISM Services 54.1% (Briefing.com consensus 53.0%); Prior 52.1%
  • The key takeaway from the report is that it was a double-whammy for rate cut expectations in that the expansion in services sector activity accelerated while the prices index picked up noticeably, printing its first reading above 60.0% since January 2024.
• November JOLTS - Job Openings 8.098 mln; Prior was revised to 7.839 mln from 7.744 mln

Wednesday: 

It was a choppy session in the stock market. Participants were dealing with rising rates (10-yr yield hitting 4.73% at its high), volatile mega caps, and some economic releases. Ultimately, the S&P 500 settled 0.2% higher and the Dow Jones Industrial Average rose 0.3% while the Nasdaq Composite declined 0.1%.

The Treasury market settled little changed from Tuesday after a choppy session. The 10-yr yield rose one basis point to 4.69% and the 2-yr yield settled one basis point lower at 4.29%. Treasuries were responding to this morning's economic releases, along with today's $22 billion 30-yr bond reopening, which met strong demand.

The economic data included a below-consensus ADP Employment Change report for December (122,000; Briefing.com consensus 131,000), and an unexpected drop in weekly Initial Claims (201,000; Briefing.com consensus 218,000; prior 211,000).

Market participants also received the FOMC Minutes for the December 17-18 meeting, which echoed Fed Chair Powell's remarks in his press conference after the meeting. The minutes conveyed a belief that the Fed should hold off on another rate cut until it has more confidence in inflation returning to its 2% target and/or more concern about the labor market deteriorating in a more pronounced manner.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications -3.7%; Prior -21.9%
• December ADP Employment Change 122K (Briefing.com consensus 131K); Prior 146K
• Weekly Initial Claims 201K (Briefing.com consensus 218K); Prior 211K, Weekly Continuing Claims 1.867 mln; Prior was revised to 1.834 mln from 1.844 mln
  • The key takeaway from the report is that layoff activity is low, but for employees that lose their job it has become more challenging to find a new one.
• November Wholesale Inventories -0.2% (Briefing.com consensus -0.2%); Prior was revised to 0.0% from 0.2%
• November Consumer Credit -$7.49 bln (Briefing.com consensus $9.1 bln); prior revised to $17.3 bln from $19.2 bln
  • The key takeaway from the report is that consumer credit contracted in November for only the third time in the past 16 months with revolving credit, which is subject to extra high interest rates, acting as the drag.

Friday:

Major equity indices registered significant declines, driven by a surge in market rates following the release of this morning’s labor market data. The market’s negative sentiment following the report was largely attributed to concerns over persistent inflationary pressures, fueled by a robust labor market and earnings growth, alongside worries that the Federal Reserve may maintain higher interest rates for an extended period.

The broader market experienced widespread losses, with ten of the 11 S&P 500 sectors in the red. Market breadth reflects this downside skew, with decliners outpacing advancers by a 4-to-1 margin on the NYSE and by a 3-to-1 margin on the Nasdaq.

Some individual stocks outperformed, driven by specific catalysts.

Reviewing Friday's economic data:

• December Nonfarm Payrolls 256K (Briefing.com consensus 154K); Prior was revised to 212K from 227K,December Nonfarm Private Payrolls 223K (Briefing.com consensus 140K); Prior was revised to 182K from 194K,
• December Avg. Hourly Earnings 0.3% (Briefing.com consensus 0.3%); Prior 0.4%, December Unemployment Rate 4.1% (Briefing.com consensus 4.2%); Prior 4.2%, December Average Workweek 34.3 (Briefing.com consensus 34.3); Prior 34.3
  • The key takeaway from the report for the market is that it was perhaps too good, which makes it think one of two things, if not both: the Fed may have made a mistake cutting rates as aggressively as it did at the end of 2024, thereby fueling the prospect of sticky inflation because the labor market is still strong, and there isn't going to be another rate cut for an extended period.
• January Univ. of Michigan Consumer Sentiment - Prelim 73.2 (Briefing.com consensus 73.5); Prior 74.0
  • The key takeaway from the report is that consumers' worries about the future path of inflation increased, which is not what the Fed wants to hear, especially as plans to implement new tariffs loom on the near horizon.