Michael Reinking:
Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Now every week we are here to keep you up to date on the key trends and events driving global markets. Now, welcome back. This is the first full trading week of 2025, and as promised, it has been packed full of catalysts, which has caused some big swings in financial markets. As we record on Thursday morning. Let's dive into this week's market storylines.
Now, the recent rise in interest rates has been the primary concern within equity markets. Since the Federal Reserve began cutting rates in September, the 10-year yield has risen about 1%, which is not the typical behavior when an easing cycle begins. Now, as we've talked about in previous episodes, this has been happening for a variety of reasons, including the stronger than expected economic data, sticky inflation and concerns about growing fiscal deficits, which has caused an increase in the term premium, which is really just a fancy way of describing the excess return demanded by investors for taking the risk of holding longer term bonds.
Now, the move in yields has accelerated to the upside after the Fed's meeting in December, as the central bank suggested that the pace of rate cuts would slow given the strength of the economy, and as there has been more concern about inflation risks with questions about policy from the incoming administration making the situation difficult to assess.
Now, we left you last week ahead of Friday's jobs report with investors on edge as longer dated Treasury yields we're testing the 2024 highs. The employment report came in well ahead of expectations with non-farm payrolls up 256,000, about 100,000 more than expected. The Household Survey, which has undershot, the Establishment Survey for much of the last year was also very strong, which helped the unemployment rate tick down to 4.1% from 4.2%, while the wages data showed some moderation from the previous month, but was still up 3.9% annually. Now, under most circumstances, a strong report like this would be applauded by financial markets, but given the dynamics I laid out earlier, equity markets sold off sharply on Friday as Treasury yields moved higher. Now this left the S&P 500 down just under 2% for the week, its fourth decline in the last five weeks with the index closing just under the post-election lows.
The weakness carried through coming out of the weekend on Monday as yields and oil prices continued to move higher and tech stocks were under pressure as President Biden announced additional restrictions on the export of AI technology. However, major indices tested some key technical levels after the open with the S&P 500, filling the election gap, taking the index down just over 5% from its highs. While the equal weight version of the index got within 10 points of its 200-day moving average, a level that has not been tested since it was reclaimed in November of 2023 after the initial Fed pivot.
Now this brought in some buying interest and despite the tech underperformance, most major indices ended the day higher. Now Tuesday brought the first of this week's inflation data with PPI coming in slightly better than feared. There was only a minimal pullback in Treasury yields, and while equity markets did end mostly higher, you could see that traders were nervous ahead of the all-important CPI report in the start of earnings season on Wednesday with the VIX spending most of the day just under 20.
Now, Wednesday got off to a good start with UK inflation data coming in better than expected, and a 10-year guilt auction going off without a hitch, as this has been a source of some volatility over the last week. Now, the bank earnings started to roll in and by all accounts were strong with companies beating on both the top and bottom line, with management teams highlighting the business optimism heading in to 2025. Now, this had futures modestly higher ahead of the open, but the real fireworks came after the CPI report. The report itself was mixed with headline coming in slightly above expectations, driven by a jump in energy prices which accounted for 40% of the monthly increase. However, the core reading came in a 10th better than expected, showing some moderation from the previous month, up 3.2% on an annual basis.
Now, this by no means was a perfect report, but did help Treasury yields fall sharply reversing all of the post jobs report move higher and equity markets reacted in kind with the S&P 500 ending the day up nearly 2%. Now this morning we got another round of economic data with a reasonably strong retail sales report. This week's claims data was mixed. But the real shocker of the morning was the surge in the Philly Fed Manufacturing Index, which hit its highest level since 2021 and saw the biggest monthly jump since 2020. This was driven by an increase in new orders, shipments, some improvement in employment, and a jump in prices. Now, the data we've gotten over the last week continues to point to a solid economic backdrop, though the disinflationary process has stalled out a bit.
Now as mentioned earlier, the other big storyline this week was the start of earnings season. We did publish our earnings preview, which you can find on nyse.com, and according to facts that analysts are looking for Q4 earnings to be up 11.7% year over year, the largest increase since Q4 of 2021. Now, some of the themes we'll be listening for are the impacts of higher rates in the US dollar on demand, and whether companies are seeing a pull forward of that demand ahead of potential tariffs.
Now, AI will remain a hot topic with investors looking for confirmation that CapEx spending will continue and just overnight Taiwan Semiconductor announced its budget would be up over 20% from last year. Now, investors will also be listening for examples of how the technology is being implemented to improve productivity and profitability. Now as usual, it's not so much about the quarter, but rather the guidance. I'd expect some conservatism given the policy uncertainty. This may lead to some disappointment within the market, but could set the stage for positive revisions throughout the year. Now as noted earlier, financials have gotten us off on the right foot.
Now, as we're coming to you mid-morning on Thursday, the S&P 500 has been flip-flopping between gains and losses early in the session trading just under its 50-day moving averages, but equities are solidly higher for the week. There was some improvement in the tape after influential Fed Governor Christopher Waller suggested that inflation data continued to come in like this week's data that there could be rate cuts in the first half of the year, a more dovish view than markets are currently priced for. Now, we are recording before Treasury Secretary nominee Bessent's confirmation hearings, which investors will be paying close attention to about policy going forward.
Now to close out the week, there was a round of Chinese economic data overnight and US Industrial production and housing starts will be released tomorrow. It's also options expiration, which will add to the volumes and volatility around the open and the close. Now, keep in mind, equity markets are closed next Monday for Martin Luther King Day, but it's also Inauguration Day. There is an expectation that President Trump will issue a wave of executive orders, potentially ranging from tariffs to immigration to energy policy, which will set the tone for next week. The economic calendar is a bit lighter with Global Flash PMIs on Friday, probably the most impactful, but the focus will shift to earnings which will really start to ramp up.
Now, once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on tv.nyse.com or our YouTube channel, or you can listen every Friday on the Inside the ICE House Podcast feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again soon.
Speaker 2:
That's our conversation for this week. Remember to rate, review and subscribe wherever you listen and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week inside the ICE house.
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