US Stocks Slide as Jobs Data Sparks Fresh Inflation Fears | Daily Market Analysis

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• Eurozone - ECB's Lane Speaks

The US stock market faced significant volatility on Friday, with the S&P 500 erasing its 2025 gains following a robust jobs report that stoked fresh inflation fears. This development reinforced expectations that the Federal Reserve will adopt a cautious approach to interest rate cuts this year.

Major Wall Street indices, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, experienced substantial losses, closing their second consecutive week in the red. The Dow fell by 696.75 points, or 1.63%, landing at 41,938.45, while the S&P 500 dropped 91.21 points, or 1.54%, to settle at 5,827.04. The Nasdaq Composite also declined, shedding 317.25 points, or 1.63%, to close at 19,161.63.

In the currency markets, the US Dollar Index, which measures the dollar’s strength against a basket of six major currencies, reached its highest level since November 2022, hitting 109.98 during Monday's Asian trading hours. This surge was propelled by the strong US labor market data for December, which likely supports the Fed's stance to keep interest rates steady in January. Additionally, the positive jobs data led to an increase in US Treasury yields, with the 2-year and 10-year yields rising to 4.38% and 4.76%, respectively, further bolstering the dollar.

The US Bureau of Labor Statistics reported that nonfarm payrolls surged by 256,000 in December, far surpassing market expectations of 160,000 and outpacing the revised November figure of 212,000. The unemployment rate edged down to 4.1% from November’s 4.2%. However, average hourly earnings growth slightly dipped to 3.9% from the previous 4%, indicating a modest easing in wage inflation.

Minutes from the latest Federal Open Market Committee meeting revealed that policymakers anticipate the process of stabilizing inflation could take longer than initially expected. This sentiment is echoed by St. Louis Federal Reserve President Alberto Musalem, who in a Wall Street Journal interview suggested the need for caution in reducing rates, citing the risk of inflation remaining between 2.5% and 3%.

The Japanese yen strengthened against the dollar for the third consecutive day, distancing the USD/JPY pair from its recent multi-month peak. This shift reflects a hit to global risk sentiment amid growing acceptance that the Fed will pause its rate-cutting cycle. Geopolitical risks and inflationary pressures in Japan contribute to this movement, with the Bank of Japan likely to consider another interest rate hike in early 2025, depending on wage momentum and economic conditions.

Conversely, the British pound continued its decline, hitting its lowest level since November 2023 against the dollar. The bearish sentiment surrounding the GBP/USD pair is fueled by concerns over the UK's fiscal health and the risk of stagflation, compounded by the strong dollar and expectations of a Fed pause in rate cuts.

The euro also weakened, trading negatively against the dollar for the fifth day in a row. Dovish expectations from the European Central Bank, with anticipated rate reductions by summer, exert downward pressure on the euro. The ECB’s focus on progressing toward the neutral rate without slowing pace adds to the euro's challenges.

Meanwhile, the Australian dollar extended its losses, reaching its lowest since April 2020. The AUD faced pressure due to expectations of a rate cut by the Reserve Bank of Australia and the market's response to Australia's economic data. However, the AUD found some support from China's recent stimulus measures, given the close economic ties between the two countries.

China's trade data showed a growing trade surplus in December, with exports and imports performing better than expected. These developments, along with China's economic policies, play a crucial role in shaping the Australian dollar’s trajectory.

As the global markets react to these complex dynamics, investors remain cautious, weighing the impact of US economic data, Fed policies, and international economic trends on their portfolios. The heightened volatility underscores the importance of staying informed and adaptable in the ever-evolving financial landscape of 2025.