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Fundamental Analysis

Equities Strain Under High Yields and Shifting Fed Outlook

  • A report on consumer sentiment revealed that inflation expectations rose in January.
  • US data showed an additional 256,000 jobs in December. 
  • Experts believe US inflation will increase by 0.3% on a monthly basis and 2.6% annually.

Equities struggled to make gains on Monday as Treasury yields remained elevated amid a drop in Fed rate cut expectations. At the same time, investors worried about higher inflation under Trump’s administration, which could keep rates at restrictive levels.

US Treasury 10-year yield (Source: Bloomberg)

US Treasury 10-year yield (Source: Bloomberg)

Last week, US economic data revealed a resilient economy with still-high demand, leading to a rally in yields. Figures for job vacancies, service sector business activity, and unemployment claims all pointed to robust growth. At the same time, a report on consumer sentiment revealed that inflation expectations rose in January. The rise comes amid forecasts of faster economic growth under Trump’s administration.

The main report was the nonfarm payrolls, which showed an additional 256,000 jobs in December. Meanwhile, economists had expected 164,000 new jobs. The jump indicated a robust labor market, while a lower unemployment rate showed steady demand in the sector. 

The US economy has remained resilient since the last quarter of 2024. Before that, policymakers were confident that inflation was on a rapid decline to the 2% target. As a result, the Fed forecasted 100-bps of rate cuts in 2025. However, since then, they started assuming a cautious tone. Most became slightly hawkish after Trump won the presidential election. Remarks like there is no rush to lower borrowing costs have weighed on equity markets. 

Furthermore, market participants are worried that Trump’s administration will cause a spike in inflation. The president-elect has proposed tax cuts and tariffs on imported goods. Although these policies will spur economic growth, they might also lead to increased price pressures.

Therefore, the Fed will have a difficult time lowering borrowing costs. Markets currently expect the Fed to cut rates by only 27-bps this year. Meanwhile, there is a 52.9% chance that policymakers will vote to cut rates in June. 

The next major report will show the state of wholesale and consumer inflation in the US. Experts believe consumer inflation will increase by 0.3% on a monthly basis and 2.6% annually. This would mirror the previous readings. Anything higher will put a dent in Fed rate cut expectations. This could mean no rate cut in 2025, higher yields, and downward pressure on equities. On the other hand, softer figures might increase rate-cut bets, boosting equities.