(Bloomberg) — Stocks struggled for direction after a dismal start to the year as traders stuck to bets that a March interest rate cut was still on the table.
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The S&P 500 fell on Friday in what was probably the worst stock market week since the end of October. The stock benchmark is heading into a nine-week bull market. The Nasdaq 100 was little changed as the tech-heavy benchmark struggled to stave off a six-day losing streak.
According to Tom Lee of Fundstrat Global Advisors LLC, the negative tone of the shortened holiday week signals that stocks face rough waters in the first half of the year.
“The first four trading days of 2024 have been a terrible start for stocks,” Lee wrote. “The year usually starts in January. That said, this turbulence in the first week of trading tells us that we need to prepare for a challenging year.”
The strategist who was one of the few to predict last year's bull market. continues to expect a rally in the second half of the year.
Stock markets fell from highs after data showed the U.S. services sector slowed in December but remained above a key level that suggests expansion.
Treasury bonds continued their slide in Friday's choppy session, remaining on track for a weekly decline. The yield on the 10-year Treasury bond reached 4.04%. U.S. bond yields faltered after earlier data showed nonfarm payrolls rose by 216,000, a larger increase than expected, and the unemployment rate held steady at 3.7% in December.
Read more: Bond traders are committed to Fed rate cuts in 2024 as data pushes yields higher
The jobs report initially dampened bets on faster and deeper interest rate cuts by the Fed. But swap traders eventually switched their bets to an easing of about 140 basis points this year, with the chance of a decline in March at about 70%. Some on Wall Street remained confident in the central bank's ability to cool the economy while preventing a downturn.
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“It appears that the economy is currently strong enough to withstand the Fed's current elevated interest rates,” said Jeremy Straub, CEO of Coastal Wealth.
Treasury Secretary Janet Yellen also expressed optimism that the global economy is on the right track after declaring that the US had achieved a much-anticipated soft landing.
Read more: Yellen declares US economy has achieved a soft landing
Many on Wall Street remained skeptical of deeper rate cuts after the payrolls report – noting that the devil was in the details. The reports did little to change the views of economists at Goldman Sachs Group Inc. and JPMorgan, as the banks reiterated their rate cut forecasts.
“This number calls into question the market's confidence in the March rate cut,” said Lindsay Rosner of Goldman Sachs Asset Management. “We have three inflation data by the March meeting. Every number counts.”
Investors will get a foretaste next Thursday. Consumer inflation for the year is expected to be 3.2%, according to economists surveyed by Bloomberg. Investors will also be keeping an eye on the financial sector next week as JPMorgan Chase & Co. and other big banks cash in on profits.
BMO Capital's Ian Lyngen said the better-than-expected jobs report “gives the Fed plenty of flexibility to delay rate cuts until early 2024.”
Vital Knowledge's Adam Crisafulli was even more cautious: “Hourly wage growth was strong and participation rates fell, all of which suggest that markets are way off the mark in their pricing for Fed easing in 2024.”
What Bloomberg Economics says:
The headline figure is likely due to an unseasonably warm winter and high hurdles due to seasonally adjusted factors to overcome. However, we believe the right signal from the report is that the labor market is weakening quickly. Ultimately, the Fed will likely place more weight on what district contacts say about underlying conditions – which are much weaker than the headline wage estimate.
– Economists led by Anna Wong
Previously, Citigroup Inc. strategists recommended buying global stocks in times of weakness, saying not to chase rallies because this year offers less upside than 2023.
In company news, Tesla Inc. is recalling more than 1.6 million cars in China due to problems with its driver assistance system. Synopsys Inc. is said to be in advanced talks to acquire engineering software provider Ansys Inc. for about $35 billion.
In China, shadow banking giant Zhongzhi Enterprise Group Co. has filed for bankruptcy. The collapse represents one of China's largest corporate collapses ever, further weighing on already weak consumer and investor sentiment.
The dollar fell after being hit by the December reports. Oil prices rose, consolidating their weekly gains, as simmering tensions in the Middle East and North Africa dwarfed signs of weakening U.S. demand.
Some of the key moves in the markets:
Shares
The S&P 500 was little changed at 2:59 p.m. New York time
The Nasdaq 100 has barely changed
The Dow Jones Industrial Average fell 0.2%
The MSCI World Index has hardly changed
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro was unchanged at $1.0945
The British pound rose 0.3% to $1.2723
The Japanese yen was little changed at 144.66 per dollar
Cryptocurrencies
Bitcoin fell 1.9% to $43,626.51
Ether fell 1.8% to $2,234.97
Tie up
The 10-year Treasury yield rose four basis points to 4.04%
The 10-year German government bond yield rose three basis points to 2.16%
The 10-year UK government bond yield rose six basis points to 3.79%
raw materials
West Texas Intermediate crude oil prices rose 2.1% to $73.71 a barrel
Spot gold rose 0.1% to $2,046.03 an ounce
This story was produced with support from Bloomberg Automation.
– With support from Alex Nicholson, Edward Bolingbroke, Allegra Catelli, Cecile Gutscher and Sujata Rao.
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