Signs of weakness have appeared across U.S. equity markets since late 2024, and the S&P 500 is off to a muted start in 2025. The 10-year Treasury yield is above 4.7%, the highest level since November 2023. Despite a 100-basis point cut in the overnight lending rate by the Fed since September, the long end of the Treasury interest rate curve continues to inch higher. The market seems to be absorbing recent strong economic news, which suggests inflation may remain elevated conditioned upon the strength of the labor market and wage price pressure associated with tight labor markets. 

In FOMC minutes from the December Fed meeting, the committee noted the elevated policy uncertainty of the Trump administration may lead to a sustained level of inflation above 2% and indicated that the pace of rate cuts could start to slow in 2025. Current projections show only two quarter-point rate cuts this year, compared with four rate cuts back in September last year. The market’s reaction to today’s job may be negative if there is a much larger than expected growth in new jobs in December, associated with a firming up of rates. However, the market may react positively if the number of new jobs beats estimates by a slight margin, indicating a softer inflation and interest rate outlook.

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