Strong labor numbers brought out the good news is bad news theme for the markets. High private payroll numbers combined with low initial jobless claims point to a continuing strong economy, which should be good news. However, a strong economy means the Fed may be hesitant to lower interest rates in the near term. The S&P 500 ended last week with a loss of -1.91%, while the Dow Jones Industrial Average (DJIA) dropped -1.83%. The technology heavy NASDAQ was hit even harder with a loss of -2.34%. The MSCI All Country World ex-USA held up better than our domestic markets down only -0.51%.

Last week’s deluge of labor market data provided more evidence that the U.S. employment outlook is finding its footing after softening throughout most of 2024. Private payrolls jumped for December coming in at 256,000, according to the Bureau of Labor statistics, blowing past the forecast amount of 155,000. The unemployment rate dropped from 4.2% to 4.1% and now appears to be trending sideways. Average hourly earnings increased 0.3% as expected for the month and the 12-month increase of 3.9% was a little lower than forecast. Meanwhile, weekly initial jobless claims have tumbled lower and reached their lowest point since last February with last week’s reading of just 201k.

The November JOLTS (Job Openings Labor Turnover Survey) gave further credence to stabilizing employment conditions as job openings rose above 8 million for the first time since May. However, the report also showed that the quits rate was tied for the lowest since 2020. Increased wages and fewer job openings are encouraging those with a job to stay. Altogether, last week’s jobs data painted a picture of a labor market coming into a healthy balance and helped dispel fears that unemployment would continue to rise and trigger a recession.

At the same time, concerns of a reacceleration in employment are escalating. The ISM services index reported 54.1% in December, higher than the previous month by 2 percentage points. The prices paid component (an indication of inflation pressures) showed a strong increase to 64.4%, the first time over 60% since the beginning of the year. Steve Miller, chair of ISM’s Business Survey Committee, said, “tariff concerns elicited the most panelist comments.” Many businesses have increased orders in an effort to front-run potential tariff impacts, thereby pushing up prices.

As the downside risk to labor markets is easing and the upside risk to inflation is coming more into focus, there has been a notable shift in expectations for the Federal Reserve’s monetary policy in the year ahead. In fact, Fed fund futures are no longer fully pricing in even one rate cut in 2025. The 10-year Treasury yield jumped to highest level in over a year closing the week at 4.77%on the strong jobs report signaling the Fed may need to hold rates at current levels to hold down inflation.

This week inflation numbers come out with PPI (Producer Price Inflation) and the CPI (Consumer Price Inflation). Neither of these are expected to make big moves, but any increases may add fuel to the Fed holding rates as they are and waiting for inflation to start declining before lowering interest rates.

We said an official goodbye last week to President Jimmy Carter who passed away on December 29, 2024, at the age of 100. He was, among many other things, a humanitarian. His efforts towards peace and caring for others were on both an international and local level. We would be fortunate to have more who walked that walk.