(Bloomberg) -- Stocks came well off session lows as a solid $22 billion sale of 30-year Treasuries brought a degree of relief after a recent spike in yields that unsettled investors around the globe.
The S&P 500 was little changed, following a slide that earlier sent the gauge below 5,900. Yet equities struggled to gain a whole lot of traction as traders refrained from making riskier bets, with the market set to close on the eve of Friday’s jobs report. The options market is betting the US equity benchmark will move roughly 1.2% in either direction after the US employment data, according to Citigroup Inc. That would be the biggest implied move on a jobs day since September.
Treasury Sells $22b 30Y at 4.913% vs 4.920% WI Yield at Deadline
US employers probably tempered their hiring last month to wrap up a year of moderating yet still-healthy job growth that economists expect to carry on in 2025. A survey conducted by 22V Research showed most investors are watching payrolls closer than normal. Only 26% of the respondents think Friday’s data will be “risk-on,” 40% said “risk-off,” and 34% “mixed/negligible.”
“Investors will want to see a return to Goldilocks data, consistent with a cooling labor market to help temper the recent spike in yields and help stocks stabilize,” said Tom Essaye at The Sevens Report.
The S&P 500 was little changed. The Nasdaq 100 dropped 0.2%. The Dow Jones Industrial Average wavered. US stock markets will close Jan. 9, in observance of a national day of mourning for former President Jimmy Carter. The bond market will close at 2 p.m. New York time.
The yield on 10-year Treasuries declined one basis point to 4.67%. The 20-year yield, a laggard on the US government debt curve since its re-introduction in 2020, touched the 5% mark. UK markets tumbled, pushing bond yields to the highest in more than a decade. The Bloomberg Dollar Spot Index rose 0.4%.
Just ahead of Friday’s jobs report, data showed US private-sector hiring and wage growth slowed in December, indicating an ongoing moderation in demand for workers. Federal Reserve Governor Christopher Waller said he believes inflation will continue to cool toward the central bank’s 2% target.
“While further near-term strength in the labor market is likely to keep expectations around 1-2 cuts in 2025 for now, we continue to believe that inflation will continue to slowly trend down while employment stays in balance allowing the Fed to cut rates three times in 2025,” said Chris Senyek at Wolfe Research.
While the recent slide in stocks and bonds could worsen as traders fret over the prospect of higher inflation and interest rates, the decline is unlikely to reach the extremes seen in 2022 when markets weathered their worst year since the global financial crisis, according to Morgan Stanley’s Mike Wilson.
The bank’s chief US equity strategist expects a choppy first half of 2025 and an improved second part of the year, he said during an interview with Bloomberg Television on Wednesday. The difference between now and then is that the Federal Reserve in 2022 was aggressively raising interest rates at a pace that is unlikely going to be repeated in the foreseeable future.
There is not as much downside for rates today “but that doesn’t mean there couldn’t be 10% downside for many stocks if rates stay at this level,” Wilson noted.
There’s room for stocks to fall further as bond yields approach levels that have been painful for equities in recent years.
“Equity/bond yield correlations have turned negative again,” Goldman Sachs Group Inc. strategists including Christian Mueller-Glissmann wrote in a note, stressing that if yields keep going up without good economic data, it will hit equity markets. “With equities having been relatively resilient during the bond selloff, we think near-term correction risk is somewhat elevated in case of negative growth news.”
“Historically, the most common driver of significant losses are recessions,” said Henry Allen at Deutsche Bank AG. “The huge plunges in 2020 and 2008 required an economic contraction, and the bursting of the dot-com bubble also happened amidst a slowdown that ended up in a recession in 2001. But right now, there’s no sign of a slowdown, and if anything, several leading indicators are looking increasingly positive.”
If economic growth stays robust and the Fed doesn’t start pivoting in a hawkish direction, it’s not implausible that elevated valuations continue for some time, Allen noted. However, if signs of a slowdown emerge or rate hikes move back on the table, the historic precedents show that equities are capable of a notable decline, even without a recession, he concluded.
“The start of the new year has been volatile,” said Craig Johnson at Piper Sandler. “Increased sensitivity to rising bond yields and short-term oversold conditions are testing investors’ patience and nerves. Despite the increased caution, we remain optimistic as the major indices’ primary uptrends remain well-intact.”
Corporate Highlights:
Albertsons Cos. raised its adjusted earnings outlook for the full year, a positive sign for the grocer seeking to pave a new path after its proposed deal with Kroger Co. fell apart.
Advanced Micro Devices Inc. was downgraded to reduce from buy at HSBC, which cited difficulty in competing with Nvidia Corp.
Merck & Co. was downgraded to hold from buy at Truist Securities, which cited growth concerns at the pharmaceutical company.
Palo Alto Networks Inc., a security software company, received a pair of analyst downgrades.
The US utilities sector was upgraded to overweight from market weight at RBC Capital Markets, which called the group the “top defensive sector.”
Key events this week:
China CPI, PPI, Thursday
Eurozone retail sales, Thursday
US state funeral and national day of mourning for former President Jimmy Carter is a federal holiday, Thursday
Japan household spending, leading index, Friday
US jobs report, consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 was little changed as of 1:09 p.m. New York time
The Nasdaq 100 fell 0.2%
The Dow Jones Industrial Average was little changed
The MSCI World Index fell 0.2%
Currencies
The Bloomberg Dollar Spot Index rose 0.4%
The euro fell 0.3% to $1.0308
The British pound fell 1% to $1.2354
The Japanese yen fell 0.2% to 158.35 per dollar
Cryptocurrencies
Bitcoin fell 2.2% to $94,401.42
Ether fell 2.1% to $3,292.16
Bonds
The yield on 10-year Treasuries declined one basis point to 4.67%
Germany’s 10-year yield advanced seven basis points to 2.55%
Britain’s 10-year yield advanced 11 basis points to 4.80%
Commodities
West Texas Intermediate crude fell 1.2% to $73.33 a barrel
Spot gold rose 0.4% to $2,657.97 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Andre Janse van Vuuren, Sujata Rao, Kit Rees, Joanna Ossinger and Rob Verdonck.
