The robust and much higher-than-expected employment growth in the December jobs report on Friday essentially wiped out any thoughts of another Federal Reserve rate cut on January 29. Job growth continued to bounce back from the hurricanes and strike-impacted October data. The economy entered 2025 with some momentum, as the Atlanta Fed currently estimates 2.7% GDP growth for the fourth quarter.

Employment grew by 256,000 nonfarm jobs, which was well above expectations. Previous data was revised slightly lower, but not enough to diminish the strong report. The household survey data was even more impressive, with a gain of 478,000 jobs, and the research series, which mirrors the payroll report criteria, rose by 102,000.

Wage growth was a little below expectations at 3.9% year-over-year, down from 4.0% last month. The average workweek hours were unchanged at 34.3, above the four-year low of 34.2 in January, July, and October.

The high-frequency initial and continuing filings for unemployment benefits confirm the reversal of the impact of the hurricanes and strike. Initial filings are nearing the lows of 2024. However, continuing claims for benefits are above the lows, indicating some slowdown in people being rehired relative to early 2024.

The unemployment rate ticked down to 4.1% from 4.2%. Before the decline from the August 2024 unemployment rate highs, the rate had risen enough off the lows to signal an impending recession by the Sahm Rule. The Sahm Rule has an unblemished track record of forecasting recession, but there are several reasons to believe that it might be overstating the risk of recession during this cycle. Last month, the rate was within a whisker of triggering the Sahm Rule again, but the December unemployment decline moved it away from danger.

Monitoring the prime-age, 25- to 54-year-old employment-to-population ratio should help signal when concern about the rising unemployment rate is warranted. The decline in the three-month average of the prime-age employment-to-population ratio is evidence of some labor market softening. It should be monitored closely, but it does not yet pose an imminent threat to the economy’s health, and the monthly reading improved in December.

The ten-year U.S. Treasury yield rose to a 52-week closing high of 4.76% in response to the resilient employment report. At 2.29%, real, after-inflation expectations, ten-year U.S. Treasury yields are now above the average during the 1999 to 2008 period and well above the post-global financial crisis period.

Stocks had a down week and erased their year-to-date gains due to higher bond yields and an expectation of fewer Fed rate cuts. The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), had a similar move lower.

Though the outperformance declined slightly after the jobs report, the more economically sensitive cyclical stocks have outperformed defensive stocks, which are less impacted by the economy. This ratio remains elevated, which indicates that investors continue to price a low probability of recession risk in stocks. The more economically sensitive small-capitalization stocks and banks underperformed this week, so some cracks might be forming.

This week, Wednesday’s consumer inflation (CPI) report is a crucial economic report. Consensus estimates expect December CPI to rise to 2.9% year-over-year from 2.7%. The Cleveland Fed’s CPI supports this view and should, combined with the robust jobs report, slam the door shut on any thought of a 25 basis point cut at the January 29 meeting.

Futures pricing reacted to the strong jobs report by slashing the expectations for total Federal Reserve rate cuts in 2025 from two to just one 25 (0.25%) basis point cut. Further, no Fed rate reductions are forecasted until at least mid-year.

While the robust Friday jobs report would seemingly be good news, investors sent stocks lower and bond yields higher. Stocks often agitate for lower rates from the Federal Reserve, as easy money tends to feed speculation. In addition, bond yields have been moving higher, which can weigh on valuations. If higher yields are accompanied by economic growth and better corporate earnings, stocks can shake them off over time. While bond yields might continue to move higher, current yields have begun to look attractive when viewed through the expected after-inflation return. Wednesday’s consumer inflation (CPI) report could add to the upward pressure on bond yields.