Fed Minutes Loom After Tuesday's Yield Spike
Schwab Market Update Audio
Deep Dive
Why did Treasury yields spike on Tuesday, and what impact did it have on the stock market?
Treasury yields spiked due to stronger-than-expected U.S. services and job openings data, which reduced hopes for future rate cuts. The 10-year Treasury note yield reached a seven-month intraday high of just under 4.7%, and the 30-year Treasury bond approached 5%. This rise in yields, driven by inflation fears and optimism about growth, created a challenging environment for stocks, causing the S&P 500 to fall 1.1%, the Dow Jones Industrial Average to drop 0.42%, and the Nasdaq Composite to plunge 1.89%.
What insights might the December Federal Open Market Committee (FOMC) minutes provide?
The December FOMC minutes, released at 2 p.m. Eastern time, could reveal the specific hesitations behind the dissent during the rate cut decision and highlight any hawkish factors influencing the debate. Policymakers' focus on certain data or economic developments, such as labor market conditions, may offer clues about future Fed strategy. The minutes are particularly significant due to the divergence of views among committee members during the meeting.
What were the key takeaways from the November JOLTS report and December ISM Services PMI?
The November JOLTS report showed job openings at a six-month high of 8.098 million, up by 259,000 from October and above Wall Street's consensus of 7.7 million. The December ISM Services PMI headline of 54.1 exceeded analysts' expectations of 53, indicating continued expansion in the services sector. However, the prices component of 64.4, up from 58.2 in November, raised inflation concerns and contributed to the spike in Treasury yields.
How did rising yields affect specific stock market sectors on Tuesday?
Rising yields negatively impacted sectors like communication services, infotech, and consumer discretionary, which fell 1% or more. Energy and health care sectors, traditionally defensive, managed to stay positive. Infotech, in particular, dropped over 2% due to inflation fears and news of the U.S. adding two Chinese tech companies to its military cooperation list. Dividend-focused sectors like utilities and staples also struggled as yields climbed.
What are the expectations for the upcoming December nonfarm payrolls report?
The December nonfarm payrolls report is expected to show jobs growth of around 154,000, with unemployment at 4.3%. This would be a moderate reading historically but below the 200,000 to 300,000 range seen post-pandemic. The report may contrast with the strong JOLTS and initial jobless claims data, which indicate a relatively healthy job market despite continuing claims remaining near three-year highs.
What technical levels are being watched for the S&P 500 after its recent decline?
The S&P 500 fell below its 50-day moving average near 5,950, with technical support levels being monitored at 5,870 and the 100-day moving average near 5,813. The index closed at 5,909.03, down 1.1%, but found buyers near the 5,900 level in the final half-hour of trading, suggesting potential support at that level.
- Stronger-than-expected U.S. services and job openings data reduced rate cut hopes
- Seven-month highs in long-term Treasury yields
- FOMC cut rates by 25 basis points with one dissent and considerable debate
- CME FedWatch tool shows a 95% chance of a rate pause this month, with only one to two more cuts likely this year
Shownotes Transcript
Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here's Schwab's early look at the markets for Wednesday, January 8th.
First, an important note. Tomorrow, the markets are closed for observance of the National Day of Mourning for President Jimmy Carter. Tomorrow, we will have a special episode of our sister podcast, On Investing, which originally aired last month. The regular Schwab Market Update podcast will return on Friday, January 10th.
After two solid economic reports yesterday returned inflation fears to the front burner and helped capsize stocks, investors get a look behind the scenes at the last Federal Reserve meeting. Stocks limp into Wednesday, burdened by seven-month highs in long-term Treasury yields, a reaction to stronger-than-expected U.S. services and job openings data that reduced rate cut hopes.
Minutes from the December Federal Open Market Committee meeting are due at 2 p.m. Eastern time. While the market sometimes views Fed minutes with a collective yawn, today may be an exception considering the divergence of views that emerged from last month's meeting. The FOMC cut rates by 25 basis points then, but there was one dissent and apparently quite a bit of debate behind the scenes.
Today's minutes might point towards specific hesitations were behind that dissent and any other factors that created a somewhat hawkish atmosphere. Which data or economic developments policymakers flagged before the decision could give investors a sense to where to focus for clues on Fed strategy.
Labor, including this Friday's non-farm payrolls report, is one obvious place to look. And if yesterday's job openings report were any clue, the job market isn't flagging quite as much as some at the Fed might have expected. The November job openings and labor turnover survey, or JOLTS, hit a six-month high of $8.098 million, up by $259,000 from October and above Wall Street's $7.7 million consensus.
Joltz came in at the same time as the December ISM Services PMI. Its headline of 54.1 topped analysts' consensus view of 53 and continued a string of headlines above the 50 level that denotes expansion for services-oriented U.S. businesses.
But that wasn't the number that grabbed attention. The prices component of 64.4 jumped dramatically from 58.2 in November, and along with the surprise gain in jolts, helped send the benchmark 10-year Treasury note yield to a new seven-month intraday high of just under 4.7%. The 30-year Treasury bond, meanwhile, is knocking at the door of 5%.
The relentless rise in yields, now up more than 50 basis points for the 10-year note in just over a month, has created a muddy playing field for stocks. The market turned down after the ISM services release showed a jump in prices paid, said Lizanne Saunders, chief investment strategist at Schwab. The 10-year yield jump didn't help stocks.
The CME FedWatch tool now shows 95% chances the Fed pauses rates at this month's meeting. Only one to two more cuts are seen likely this year. While some of the rise in yields appears to reflect optimism about growth, inflationary worries haven't vanished.
Possible changes to tariff and immigration policy under the new administration has created a heavy term premium in the Treasury market, meaning investors are demanding higher and higher yields to hold long-term debt amid inflation concerns. Tuesday's $39 billion Treasury auction of 10-year notes met soft demand, another sign that investors might want higher yields in return for parking their money longer. This tends to happen when inflation worries bubble.
Markets are closed tomorrow to observe a national day of mourning for President Jimmy Carter, but the government is still expected to issue initial and continuing weekly jobless claims that morning. Analysts expect initial claims of 218,000, a relatively mild amount, according to Briefing.com. After the day away, Friday's December nonfarm payrolls report is expected to show jobs growth of around 154,000, with unemployment at 4.3%.
November's readings were 227,000 and 4.2%, respectively. If the report meets estimates, it might go against the grain of Jolt's and initial jobless claims. Those readings generally look healthy, though continuing claims remain near three-year highs. The consensus reading would be moderate historically, but well below the 200,000 to 300,000 that investors got used to in the years after the pandemic.
From a sector standpoint, some of last year's leaders performed worst on Tuesday as yields climbed. Communication services, infotech, and consumer discretionary struggled, all falling 1% or more. Only energy and the traditionally defensive health care sectors managed to stay green. Tight oil supplies and expected higher Chinese demand underpin the energy market for now, but longer-term supply expectations appear bearish.
Infotech took a major spill yesterday, sliding more than 2% on inflation fears and news that the U.S. had added two Chinese technology companies to its list of entities cooperating with the Chinese military. The tech sector is often seen as particularly vulnerable to trade tension with China. Rising yields also helped pin down sectors associated with dividends, including utilities and staples.
Technically, the S&P 500 fell below its 50-day moving average near 5,950. There appears to be an area of technical support near 5,870, and below that is the 100-day moving average that held as support on several sell-offs last year. It's now near 5,813.
The S&P 500 index plunged 66.35 points, or 1.1%, to 5,909.03. The Dow Jones Industrial Average gave back 178.20 points, or 0.42%, to 42,528.36. And the Nasdaq Composite dropped 375.30 points, or 1.89%, to 19,489.68.
Major indexes finished slightly above their intraday lows, with the S&P 500 appearing to find buyers at the 5,900 level in the last half hour. This has been the Schwab Market Update Podcast.
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