US bond yields rose to 4.77%, reducing stock appeal. Rising oil and gold prices fuelled by supply constraints and inflation fears. Bitcoin dropped 7.46%, while the dollar strengthened against the euro.

US Treasury bond yields increased over the week, with the 10-year US bond yield rising to 4.77%. This reduces the appeal of stocks and riskier assets, as the "risk-free" asset now offers a yield close to 5%. Historically, a 5% yield has often been a signal of an impending recession. While there are various factors contributing to higher rates, the most significant include the potential for widespread tariffs, immigrant deportations, and deficit-financed tax cuts. These policies are likely to fuel inflation and increase the country's debt burden. As a result, stock markets and other overvalued assets face growing risks of a sell-off if interest rates continue to climb.

US stock markets closed the week sharply lower, with small- and micro-cap stocks dropping by 3.39% and 6.18%, respectively. Large-cap stocks fell nearly 2%, and the "Magnificent 7" declined by 2.09%. With the US stock market currently trading at historically high valuations, rising bond yields are encouraging investors to move toward lower-risk, higher-yielding assets.

The US dollar strengthened against the euro, reaching 0.973893. Meanwhile, crude oil (WTI) prices surged by more than 5%, driven by supply constraints. OPEC's production fell by 50,000 barrels per day in December due to maintenance in the UAE and declining Iranian output, in line with OPEC+'s strategy to limit supply. Saudi Arabia and Iraq maintained steady production levels, while Western sanctions on Russian crude and US efforts to restrict Russian exports further tightened supply. The anticipated 300,000 bpd drop in Iranian output contributed to rising concerns, pushing prices higher despite uncertain demand. Gold prices increased by 2.44%, signalling that inflation is gaining momentum, even as the Fed searches for reasons to continue rate cuts. The combination of rising consumer prices, political instability, and a financially repressed environment creates a favourable backdrop for safe-haven assets. In contrast, Bitcoin fell by 7.46% over the week.

The Services ISM index shows growth, despite inflation and supply chain issues. Job growth is strong, but lower-wage sectors dominate. Consumer sentiment remains stable with rising inflation expectations.

In December, the Services ISM index rose to 54.1, signalling growth despite inflation, and supply chain issues. Business activity and new orders saw positive momentum, though inflationary pressures grew, with the prices paid component reaching its highest since February 2023. The labour market showed strong job growth in December with 256,000 new jobs, supporting expectations of a Fed pause. However, job quality concerns persist, with reliance on lower-wage sectors. Consumer sentiment remained stable, with improved personal finances but rising inflation expectations, especially among lower-income consumers. Short-term and long-term inflation expectations rose, reflecting growing concerns over future inflation and economic outlook.

The Services ISM index rose to 54.1, indicating growth, with concerns over inflation, supply chains, and moderate payroll expansion.

The Services ISM index rose to 54.1 in December, up from 52.1, surpassing the consensus expectation of 53.5. This indicates that economic activity in the services sector continues to expand, with the Business Activity Index remaining strong at 58.2, well above the neutral level of 50. New orders also saw an increase, reinforcing the positive momentum in GDP growth. However, the data also presented some cautionary signs, including a shrinking backlog of orders and only modest growth in payrolls. Inflationary pressures are becoming more pronounced, as the prices paid component of the ISM survey reached its highest level since February 2023. The impact of tariffs continues to be a concern, with businesses diversifying their supply chains and adjusting pricing strategies in anticipation of future tariff adjustments.

Despite these challenges, the overall outlook for the services sector remains positive. Nine industries reported growth, including Finance & Insurance, Retail Trade, and Health Care & Social Assistance, while six sectors, such as Real Estate and Educational Services, saw contraction. The Supplier Deliveries Index slowed, reflecting supply chain difficulties, while the Inventories Index continued in contraction. Employment growth showed a slight slowdown, with the employment index at 50.9, still in positive territory. Although some pressures persist, the sector is expected to maintain steady growth entering 2025.

We expect the services sector to remain a key driver of economic growth in the first half of the year. While Trump’s policies may benefit this sector, tariffs could have a more significant impact on manufacturing, leading to potential job losses and posing risks to broader economic growth. Additionally, labour disruptions, such as the detention of undocumented immigrants, may exacerbate labour shortages in inflation-sensitive sectors, particularly those driving wage growth.

The US jobs report shows strong growth, reinforcing expectations of a Fed pause in January, with concerns over job quality due to reliance on lower-wage sectors.

The latest US jobs report revealed an upside surprise, with December payrolls rising by 256,000, well above the consensus estimate of 165,000. Revisions to the previous two months indicated a minor downward adjustment of 8,000 jobs. The unemployment rate fell to 4.1% from 4.2%, and wage growth increased by 0.3% MoM, with the YoY growth slowing slightly to 3.9% from 4.0%. These numbers strengthen the case for the Federal Reserve to hold interest rates steady in January, and the likelihood of a rate cut soon appears increasingly remote. While benchmark revisions next month could alter the data slightly, the persistent strength in the labour market, paired with ongoing inflationary pressures, suggests the Fed is likely to maintain its current stance for an extended period. Non-farm payrolls averaged 207,000 in the first half of 2024 and 165,000 in the second half, indicating that the slowdown in job creation has been more modest than anticipated.

Job composition showed continued strength in lower-wage sectors such as private education and healthcare services (80,000), leisure and hospitality (43,000), and government (33,000). These sectors contributed to 78% of all job gains over the past two years, reflecting an ongoing trend of increased reliance on part-time and lower-paying jobs. In contrast, traditional growth sectors like business services, manufacturing, and technology have seen comparatively slower job creation, contributing just 1.22 million of the 5.2 million total jobs added over the same period. Nonetheless, the increase in both full-time and part-time employment in December — the first time since January 2024 — highlights the resilience of the labour market despite these concerns. As a result, market expectations now point to an extended Fed pause, with the first-rate cut not anticipated until September 2025. However, upcoming revisions and economic data could still alter this outlook.

We believe that the wage slowdown is positive for inflation; however, the strength of the labour market, combined with rising inflation and the uncertainty surrounding Trump's policies, will likely push the Fed to hold rates steady at least through the first two meetings. Despite Trump’s assertion that "interest rates are far too high," the broader economic context suggests a prolonged pause in rate changes.

Consumer sentiment remained stable in January, with improved personal finances, rising inflation expectations, and a decline in economic outlook, especially among lower-income consumers and Independents.

Consumer sentiment remained largely unchanged in January, declining by less than one index point from December, a shift within the margin of error. While personal financial assessments improved by approximately 5%, the economic outlook deteriorated, falling by 7% in the short term and 5% in the long term. This divergence between current and future views reflects a reduction in concerns over the immediate cost of living, tempered by heightened worries about inflation in the future. The expectations index saw a decline across political affiliations, with a 3% drop among Independents and 1.5% among Republicans. Inflation expectations for the year ahead increased significantly, rising from 2.8% in December to 3.3% in January, the highest level since May 2024 and above the pre-pandemic range of 2.3-3.0%. Long-term inflation expectations also rose from 3.0% to 3.3%, marking only the third instance in the last four years of such a notable monthly change. Both short- and long-term inflation expectations increased across various demographic groups, with particularly significant gains among lower-income consumers and Independents.

We expect consumer sentiment to remain stable. As we mentioned earlier, long-term inflation expectations may rise slightly, and that trend appears to be unfolding.