1/10/25: Resilient U.S. Labor Market Drives Economic Outlook

Market participants focused on better-than-expected labor market data this week, highlighting the resilience of the U.S. economy. The December jobs report revealed a 256,000 increase in nonfarm payrolls and a decline in the unemployment rate to 4.1%. Wage growth rose 0.3% month-over-month and 3.9% year-over-year, with gains in health care, retail, and leisure sectors, while manufacturing shed jobs. This robust labor market underscores the Federal Reserve’s challenge of managing economic growth and inflationary risks.

Minutes from the December Federal Open Market Committee (FOMC) meeting showed the decision to cut rates by 25 basis points was finely balanced, accompanied by a hawkish outlook signaling fewer rate cuts in 2025. The University of Michigan’s preliminary January survey added to inflation concerns, with long-term expectations rising to 3.3%, the highest since 2008, partly due to tariff worries under the incoming Trump administration.

Economic indicators presented mixed signals. The Services and Composite PMIs remained above 50 but fell slightly below expectations. Factory orders declined, led by defense and ships/boats categories, with durable goods orders falling 1.2%. While manufacturing showed weakness, the strength of the service sector points to resilience in the broader economy.

Markets reflected these developments. The S&P 500 fell about 1.0%, erasing its 2025 gains, while Treasury yields climbed; the 2-year rose 10 basis points to 4.38%, the 5-year added 17 basis points to 4.58%, and the 10-year gained 16 basis points to 4.76%. The 30-year yield surpassed 5% for the first time since October 2023. The dollar strengthened as traders reduced expectations for further rate cuts, while commodities saw mixed results. Gold rose 0.9% to $2,690.69 an ounce, and Brent crude reached $80.54 in London, driven by potential U.S. sanctions on Russian oil tankers and maritime insurers.

This week included moments of reflection, with an early market closure for the National Day of Mourning honoring former President Jimmy Carter and the devastating wildfires in Los Angeles. The fires have claimed at least 10 lives, destroyed over 10,000 buildings, and displaced nearly 180,000 residents. While the national economic impact is expected to be muted, local losses are projected in the tens of billions of dollars. Our thoughts are with all those affected.

Next week: National Federation of Independent Business Small Business Optimism Index, Producer Price Index, Empire Manufacturing, Consumer Price Index, Federal Reserve Beige Book, Philadelphia Fed Business Outlook, Retail Sales, New York Fed Services Business Activity, Initial Jobless Claims, Housing Starts, Building Permits, Industrial Production                                          

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