What Happened Last Week
- Global Selloff: Stocks fell as rising yields and rate uncertainty pressured equities.
- Economic Strength: Strong jobs data showed resilience, but “good news” hurt equity valuations through higher long-end bond yields.
- Fed Outlook: Waller signals 2025 rate cuts, which could offer favorable risk-reward odds in cyclicals.
What We’re Watching This Week
- Interest Rates: Watching bond auctions in Europe and Japan and incoming Treasury Secretary Bessent’s confirmation hearing for improved rate stability.
- Economic Data: December CPI and Retail Sales are critical tier-one releases that will shape Fed pricing and rate sentiment.
- Earnings Season: 4Q earnings season kicks off Wednesday with the major U.S. banks. AI leader TSMC and healthcare giant UnitedHealth Group report later this week.
Investment Management Team’s Views
Stocks fell globally last week in a continuation of late December’s trend. Equities’ interest rate problems overshadowed positive developments in economic data (jobs) and corporate fundamentals (NVDA’s Consumer Electronic Show keynote session). Since the Fed began cutting rates in mid-September, the 10-year yield has risen over 100 basis points, including last week, driven by reduced rate cut expectations, policy uncertainty with the new administration, and a reassessment of long-term rates across the globe. While the rise in yields may be nearing an end, until momentum slows, stocks will struggle. Strong economic news will likely drive higher rates, further weighing on equity valuations.
Even if fundamentals didn’t matter last week, they likely will soon. The jobs report was strong, with no cracks in the consumer or the U.S. economy. President-Elect Trump’s tariff remarks added volatility, previewing post-January 20th challenges. With earnings season starting, we’re watching for full-year guidance and AI-related efficiency commentary. NVDA’s bullish outlook failed to lift its stock, suggesting semis may be overheated in the near term. Governor Waller reaffirmed 2025 rate cut expectations, though less than one cut is priced for this year. Cyclical, rate-sensitive sectors present attractive risk-reward opportunities in this environment.
Stability in interest rates is sorely needed for market sentiment in the first full trading week since mid-December. Bond auctions in Europe and Japan and Bessent’s confirmation hearing for Treasury Secretary are two key catalysts on this front. The one-two punch of the December Consumer Price Index on Wednesday and Retail Sales on Thursday will likely influence Fed pricing and rate sentiment further out the yield curve. On the fundamental side, Wednesday morning is the unofficial kick-off of the fourth quarter earnings season, with reports from many big banks. Key AI player Taiwan Semiconductor Manufacturing Co (TSMC) and healthcare giant United Health Group (UNH) will report later in the week.
