After Hot Jobs Data, Focus Turns to Earnings, CPI

Here is Schwab's early look at the markets for Monday, January 6:

U.S. jobs data take the spotlight this week, starting with job openings tomorrow and reaching a crescendo Friday with the December nonfarm payrolls report. 
Stock trading is shut Thursday to observe a National Day of Mourning for President Jimmy Carter, and bonds close early that day. Though the closure ahead of the jobs report could inject volatility, the Cboe Volatility Index (VIX) fell 8% Friday after testing the pivotal 20 level on Thursday.

Recent seven-month highs in yields and strength in the dollar and crude oil represent possible headwinds this week. A combination of U.S. economic strength, fiscal policy worries, sticky inflation, a cautious Federal Reserve, and hopes for a stimulus of China's sagging economy drove those measures higher over the last month, creating a rocky road for U.S. equities. Friday saw a five-day losing streak end with a solid rally, though major indexes still dropped for the week.

Treasury yields helped set the tone recently and may keep calling the shots, with stocks generally rising on days when the 10-year yield falls and falling when the 10-year yield rises. That benchmark yield is near its 2024 peaks, but the yield curve has steepened. This reflects recent Fed rate cuts accompanied by worries that fiscal policy and inflation could keep the Fed on pause for the long-term. Futures trading puts odds of a rate pause this month above 88%, according to the CME FedWatch tool.

One difference maker could be the labor climate, which comes into focus starting at 10 a.m. ET tomorrow when the government releases its November Job Openings and Labor Turnover Survey (JOLTS).

"A lot depends on the economic data—especially the labor market data—but until there are clear signs that growth is slowing and unemployment is pushing higher, the market's bias is towards higher yields," said Kathy Jones, chief fixed income strategist at Schwab.

The JOLTS data is followed by the December ADP monthly private payrolls report on Wednesday morning. Weekly jobless claims data are still scheduled to come out Thursday although that may change with the government shut down that day. Last week's jobless claims report reinforced ideas that the Fed might stay cautious on rate cuts, as it showed weekly initial claims falling to their lowest level in months and continuing claims down sharply.

The Fed is in prime view, too, on Wednesday afternoon when investors receive minutes from the last Federal Open Market Committee (FOMC) meeting.

Down the Mall from the Fed, another Washington, D.C., institution is in focus this week after Friday's opening of the new Congress led by Republicans. Major indexes climbed sharply after the election on hopes for business-friendly regulatory and tax reform, but bringing those policies to fruition requires cooperation on the Hill. There's also concern on Wall Street about President-elect Trump's proposed tariffs on imports.

"Expect President Trump to impose tariffs on imports from other countries on Day One,," said Michael Townsend, managing director, legislative and regulatory affairs, at Schwab. "But the scope of those tariffs is the key thing to watch. He called during the campaign for tariffs on all imports, but there is a sense in Washington that the actual tariffs may be more nuanced and targeted, given that across-the-board tariffs are considered by most economists to be inflationary and likely to cause a trade war."

Last Friday's ISM Manufacturing PMI® came in at 49.3%, below the 50% needed to denote expansion but above the consensus of 48.5%. Treasury yields immediately ticked up on the news and the benchmark 10-year Treasury note yield ended the day and week up 2 basis points at 4.6%.  Crude oil has also been ticking higher on hopes for economic stimulus in China, while the strong U.S. dollar poses another possible threat to any rally attempt.

Technically, the SPX entered Friday well below its 50-day moving average of 5,944 after running into selling pressure on a move toward that level Thursday. On Friday, it finished just under that point and remains in a trading range between the 100-day moving average near 5,800 and the 50-day.

Every S&P 500 sector tracked higher Friday, led by the usual suspects of consumer discretionary and info tech as Tesla and Nvidia drove gains. Some of the so-called cyclical sectors that had slipped in late December, including industrials and discretionary, ended up doing well Friday, but so did most of the "Magnificent Seven." One day isn't a trend, so it's too early to say if the market's missing breadth is returning.

The SPX added 73.92 points (1.26%) Friday to 5,942.47, and fell 0.48% for the week; the Dow Jones Industrial Average® ($DJI) climbed 339.86 points (0.8%) to 42,732.13, but fell 0.6% for the week; and the Nasdaq Composite® ($COMP) gained 340.88 points (+1.77%) to 19,621.68 while finishing the week down 0.51%.

Here is Schwab's early look at the markets for Monday, January 13: 
Treasury yields remain the pace setter for stocks with key inflation data ahead this week, but bank earnings starting Wednesday could provide distraction.
Friday's U.S. December jobs growth sent yields spinning higher and stocks tumbling to their lowest levels since the November election. 
Treasuries could continue calling the shots because tomorrow morning features the December Producer Price Index (PPI) and Wednesday brings the December Consumer Price Index (CPI). Last Friday's robust U.S. jobs report showed resilience in the labor market, and the market's disappointed response reaffirmed that for now, good news remains bad news for Wall Street. But it doesn't work both ways. Bad news on inflation, if it comes, would likely be seen as bad news for stocks, too.
Early expectations for PPI and CPI appear relatively benign and even somewhat constructive from a rate standpoint, though investors should remember that year-over-year comparisons get easier in coming months thanks to surprisingly firm inflation growth in early 2024. 
For PPI and core PPI, analysts expect 0.3% and 0.2% monthly growth, respectively, according to Trading Economics. Core extracts volatile food and energy prices. The readings for November were 0.4% and 0.2%.
For CPI and core CPI, analysts expect 0.3% and -0.1%, according to Trading Economics. The figures were both 0.3% in November.
Readings like these might cool off Treasury yields slightly after they skyrocketed over the last month. But worries about inflation would likely persist, some related to the proposed tariff and immigration policies promised by the new U.S. administration that takes over a week from today.
The nonfarm payrolls report showing jobs growth of 256,000 and unemployment unexpectedly dropping to 4.1% remains a source of pressure on Treasuries, too. But poring over the report in more depth shows that it's not necessarily one-sided. And a single data point can't determine if inflation rebounds.
"There isn’t much of an inflationary fingerprint in the December jobs report, given robust hiring and cooler wage growth, but the negative market reaction is not a surprise given the spike in yields," said Kevin Gordon, director, senior investment strategist at Schwab. "The correlation between changes in yields and stock prices has flipped back into negative territory, so for now, the market is assuming higher rates will be consistent with higher inflation."
Odds of Fed rate cuts this year dove after the data, with the CME FedWatch tool recently putting high likelihood of just one rate trim in 2025, likely in the second half of the year. However, futures trading still builds in about a 25% chance of a rate cut in the first quarter. The January meeting is expected to result in a rate pause.
"Even though it’s human nature to extrapolate the jobs data and expect the Fed to be on a prolonged pause, investors shouldn’t have high conviction either way at this point, mostly because we won’t get any policy meat on the bones until January 20," Schwab's Gordon said. That's when the new administration takes office, providing clues on tariff and immigration plans. Worries about those aspects of policy also play into inflation fears.
December jobs growth was concentrated in health care and government, but retail made a comeback after falling in November. This could reflect strong holiday shopping demand, a positive sign for the economy.
What's being somewhat ignored amid the hand wringing over yields is the labor market's ability, so far, to weather high yields.
"The good news for the bulls is that the economy is strong, which could help corporate earnings growth, and the U.S. economy has demonstrated over the past couple of years that it can hold up in a higher rate environment," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
That could get tested this earnings season. Banks are expected to kick things off Wednesday in relatively strong fashion thanks partly to a climbing yield curve. This can boost net-interest income, or what banks make on lending minus what they pay to customers. However, the breakdown of revenue streams differs across the sector. Banks with heavy exposure to retail and corporate lending might suffer if rates stay higher for longer because high rates can suppress business and consumer activity. Another area to watch is investment banking, where recent higher rates might limit mergers and acquisitions and initial public offering (IPO) activity.  
From a sector standpoint, energy managed light gains Friday but the rest of the market turned tail. Rate-sensitive sectors including staples, real estate, and financials were near the bottom of the list, while info tech and other growth sectors including consumer discretionary also got slammed by worries about the borrowing climate. Housing stocks like Lennar (LEN) and KB Home (KBH) took it on the chin amid worries higher rates could keep the real estate market in a deep freeze. KB Home reports later today, offering investors a closer look at demand for new homes.

Technically, the S&P 500 Index (SPX) made a late stand Friday and managed to finish above the 100-day moving average which sits just below 5,820. It was a close call, however, with the index dipping below that intraday. Ability to continue defending that line in the sand could be important for direction this week.

The SPX surrendered 91.21 points (-1.54%) to 5,827.04, down 1.94% for the week; the Dow Jones Industrial Average® ($DJI) lost 696.75 points (-1.63%) to 41,938.45 and was down 1.86% for the week; and the Nasdaq Composite® ($COMP) gave back 317.25 points (-1.63%) to 19,161.63, losing 2.34% during the week.