U.S.

Inflation fears and political uncertainty send stocks lower

U.S. equities declined during the week, which was shortened due to Thursday’s market closure in honor of former U.S. President Jimmy Carter, who recently passed away. Small-cap stocks underperformed their large-cap peers for the fifth week in the past six weeks, as the Russell 2000 Index dipped into correction territory on Friday morning. As measured by Russell 1000 indexes, value stocks held up better than their growth counterparts. The Nasdaq Composite fell 2.34%, its biggest weekly drop since mid-November.

The week started on a positive note following a report that the incoming Trump administration’s proposed stance on tariffs was likely to be softer than previously indicated, which led to most indexes finishing higher on Monday. However, optimism faded throughout the week after President-elect Donald Trump refuted these reports and several pieces of economic data fueled concerns about stubborn inflation. Traders noted that markets have been choppy to start the year, and they expect that to remain the case over the next several weeks as investors digest upcoming corporate earnings releases, the incoming administration’s policy proposals, and Federal Reserve outlook updates.

Resilient labor market and hawkish Fed minutes indicate a slower pace for rate cuts

In terms of economic data releases, on Tuesday, the Institute for Supply Management (ISM) reported its Services Purchasing Managers’ Index (PMI)—a measure of economic activity in the services sector. The index came in at 54.1 for the month of December, two percentage points higher than November’s reading (readings above 50 indicate expansion). Notably, the component of the index that measures prices paid by services organizations for materials and services increased by 6.2 percentage points to 64.4, stoking fears that progress on bringing down inflation has stalled and that interest rates could remain “higher for longer.”

Adding to these fears, Federal Reserve Governor Michelle Bowman noted in a speech on Thursday that inflation has held “uncomfortably above” the Fed’s 2% long-term target and that while the Fed made significant progress in 2023, there are still upside risks to inflation. Minutes from the Fed’s December policy meeting, released Wednesday, echoed this sentiment and indicated that most officials were comfortable holding rates steady at their upcoming meeting in January, as “almost all participants judged that upside risks to the inflation outlook had increased.”

The economic calendar wrapped up Friday morning with the Labor Department’s closely watched monthly nonfarm payrolls report for December. The report indicated that the U.S. economy added 256,000 jobs during the month, well ahead of consensus expectations for 155,000. The unemployment rate was little changed at 4.1%, and wages grew 3.9% year over year. The December data cap off a resilient year for U.S. labor markets despite facing several headwinds and seemingly provide Fed officials with another data point in favor of moderating the pace of rate cuts. Stocks turned sharply lower on Friday following the data release, solidifying the major indexes’ losses for the week.

Treasury yields surge following jobs report

U.S. Treasury yields were higher heading into Friday and jumped following the blowout jobs report, with the benchmark 10-year U.S. Treasury note yield touching its highest intraday level since November 2023 on Friday morning. (Bond prices and yields move in opposite directions.)

There was also heavy issuance in the investment-grade corporate bond market through Thursday, with deals oversubscribed on average. Despite solid demand, spreads were wider amid a large amount of issuance. Traders noted that utilities were in focus as wildfires tore through California. Our traders also noted that the high yield bond market was mixed and mostly traded in line with equities amid an unsettled backdrop.

Index	Friday's Close	Week's Change	% Change YTD
DJIA	41,938.45	-793.68	-1.42%
S&P 500	5,827.04	-115.43	-0.93%
Nasdaq Composite	19,161.63	-460.05	-0.77%
S&P MidCap 400	3,099.47	-52.67	-0.69%
Russell 2000	2,189.23	-79.24	-1.84%

UK

UK Bond Market Roiled by Political and Fiscal Concerns

The UK faced significant bond market turmoil, driven by concerns over President-elect Donald Trump’s policies, a hawkish U.S. Federal Reserve outlook, and domestic fiscal challenges. The sell-off in pound sterling and UK government bonds pushed the 10-year gilt yield to 4.8%, the highest since August 2008. Concerns about the Labour government’s ability to manage debt levels and implement budget plans added to the pressure on gilt yields.

The UK Treasury sought to reassure markets of its fiscal responsibility. Chancellor of the Exchequer Rachel Reeves reportedly urged her Cabinet colleagues to propose measures to boost economic growth, according to The Times of London.

Europe

Euro Area Inflation Exceeds 2% Target Again

In the eurozone, year-over-year inflation rose to 2.4% in December, driven by higher energy and service costs. Core inflation remained steady at 2.7%. Retail sales saw minimal growth in November after a decline in October, while the jobless rate held at a record low of 6.3%.

ECB Says Inflation on Track to Hit Target; Doves Back More Rate Cuts

The European Central Bank (ECB) indicated in its Economic Bulletin that inflation is on course to meet the medium-term 2% target. Policymakers expressed optimism about the disinflation process and suggested further rate cuts could be appropriate. Notably, Piero Cipollone highlighted the risks of running the economy below potential, while Francois Villeroy advocated for a return to neutral rates by summer if inflation trends hold steady.