Schwab Market Update

Published as of: January 10, 2025, 9:16 a.m. ET

(Friday market open) U.S. jobs growth surged to 256,000 in December, easily outpacing Wall Street's estimates, while the unemployment rate unexpectedly dropped to 4.1%, the government said today. Analysts had expected jobs growth of around 150,000 and steady unemployment, but today's data could underpin inflation concerns and strengthen ideas that the Federal Reserve might pause rate cuts. Treasury yields quickly jumped to new one-year highs, hurting major indexes.

"Overall, it was a pretty strong report with more job gains than expected but with moderating wage increases," said Collin Martin, director, senior fixed income strategist at the Schwab Center for Financial Research. "Both the nonfarm payroll and household survey rose pretty sharply after those two series diverged the previous two months. The markets had already been pricing out rate cuts for the next few meetings, and this just supports that case even more." Odds of a Fed pause this month are now 97%, according to the CME FedWatch Tool, and chances of a first quarter cut are now below 30%, down from 50% a week ago.

The jobs report followed Tuesday's surprisingly hot ISM services data, particularly prices paid. Investors may be beginning to fear that rising prices could have a domino effect, complicating monetary policy, unsettling the economy, and shaking market confidence. A strong dollar and rising crude oil (/CL) also weigh, and market breadth has narrowed considerably even as volatility climbs. The 10-year Treasury note yield jumped to 4.78% soon after the jobs report, the highest since late 2023, and major indexes tumbled. Possible technical support for the S&P 500 index (SPX) might be near a recent double bottom around 5,825.

1. Jobs report breakdown: Digging deeper into today's data, the government's survey of households showed December jobs growth of 478,000, a sharp turnaround from November and another sign of labor resilience. Average hourly earnings rose 0.3% in December and are up 3.9% year over year, a relatively subdued pace. Jobs growth was strongest in health care, retail, and government last month, the Bureau of Labor Statistics said, but there was little change in other industries and hours in the average work week remained at 34.3. Unemployment had been expected to remain at 4.2% or even climb, but this report reaffirms impressions from recent data that the labor picture remains solid.
2. Earnings could shift focus: If you're tired of constantly checking Treasury yields to determine market direction, earnings season starts next week and provides some corporate news to crunch for the first time in a while. Banks are expected to kick things off Wednesday in relatively strong fashion thanks partly to a climbing yield curve. This can boost net-interest income, or what banks make on lending minus what they pay to customers. However, the breakdown of revenue streams differs across the sector. Banks with heavy exposure to retail and corporate lending might suffer if rates stay higher for longer because high rates can suppress business and consumer activity. Another area to watch is investment banking, where recent higher rates might limit mergers and acquisitions and initial public offering (IPO) activity.
3. Tariffs and margins: Fed Governor Christopher Waller said the quiet part out loud Wednesday when he noted that "tariff proposals raise the possibility that a new source of upward pressure on inflation could emerge in the coming year." The Fed, he added, can't seriously consider the effect until it sees what policies are enacted. Still, stocks can be a leading indicator and some investors might be voting with their feet. Materials, a sector that could see an impact from higher tariffs, is down more than 8% over the last month. Staples, which includes many firms that rely on imports from Asia, is down nearly 6%. Info tech has wide exposure to trade, but it's the second-best performing sector over the last month. This could reflect investors embracing huge companies like Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) for perceived safety in a tough climate, though no stock is safe. Margins also play a role. Nvidia enjoyed a gross margin of nearly 75% its most recent quarter. That doesn't protect it from potential tariff pain but provides some padding.

• Delta (DAL) climbed nearly 8% ahead of the open after earnings per share and revenue beat Wall Street's estimates. First quarter guidance looked solid, but the full-year earnings outlook was below consensus. Demand accelerated through the fourth quarter, Delta said in its earnings release.
• Walgreens Boots Alliance (WBA) added 11% ahead of the open as earnings and revenue both came in above Wall Street's estimates for the quarter, helped by growth internationally and in the U.S. retail pharmacy business. The drugstore company maintained its fiscal 2025 guidance.
• Nvidia and Advanced Micro Devices (AMD) both dropped more than 1.5% ahead of the open on a Bloomberg report that the Biden administration could announce new chip export restrictions. The regulations could be introduced today.
• Travelers (TVR) and Allstate (ALL) both fell more than 4% ahead of the open on worries the insurers could face heavy losses from the Los Angeles fires.

Assessing Treasuries: Assuming the Fed cuts rates twice this year to an upper bound of 4% and inflation edges lower, the upper end for the 10-year Treasury yield this year could be around 5%. But there's a wide range of potential outcomes. "We suggest investors stick close to their benchmark durations and stay up in credit quality, rather than take a lot of interest rate or credit risk, given the high level of uncertainty around policy," wrote Schwab's Jones.

The materials sector ($IXB—candlesticks) was the worst performing sector of 2024 and hasn't found much buying interest yet in 2025 amid worries about tariffs' potential impact on global trade. Info tech ($IXT—purple line) suffers from similar worries and hasn't been able to maintain post-election gains but still enjoys modest growth over the last three months, in part due to strength in two of its largest components, Apple and Nvidia.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

January 13: Expected earnings from KB Home (KBH), rescheduled from January 9.
January 14: Expected earnings from Progressive (PGR), December PPI and core PPI.
January 15: Expected earnings from JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Wells Fargo (WFC), Blackrock (BLK), and December CPI and core CPI.
January 16: December retail sales and expected earnings from Morgan Stanley (MS), UnitedHealth (UNH), Taiwan Semiconductor (TSM), and Bank of America (BAC).
January 17: December housing starts and building permits.