Holiday Joy Didn’t Linger into January

Well, that was not an auspicious beginning to the year. The U.S. stock market retreated in the first full week of 2025 after starting off on an optimistic note due to speculation about softer Trump administration tariffs. However, the mood shifted after those speculations were refuted and concerning economic data — primarily around inflation and jobs — emerged.

On the inflation side, the ISM Services Index climbed to 54.1 in December, mostly due to surging prices. Then Federal Reserve Governor Michelle Bowman noted that inflation has held “uncomfortably above” the Fed’s 2% long-term target(although she did acknowledge that significant progress had been made). The Fed’s December meeting minutes backed up this sentiment, revealing officials anticipate the path to reaching target inflation “could take longer than previously anticipated.” In other words, another rate cut at the late January meeting seems unlikely.

Markets also didn’t seem to like the latest employment numbers, which painted a picture of continued economic resilience. The Bureau of Labor Statistics’ nonfarm payroll report showed an increase of 256,000 jobs, way higher than the expected +155,000.  The private sector also added 122,000 jobs, according to ADP.  Meanwhile, the unemployment rate improved to 4.1% and weekly jobless claims decreased to 201,000, an 11-month low.

The jobs report triggered a response in the bond market and pushed Treasury yields higher, with the 10-year note reaching its highest level since November 2023. The pressure extended to mortgage rates, with 30-year rates once again surpassing 7% by the end of the week.

All the data paints the picture of an economy at a crossroads. Strong employment and persistent inflation will likely delay anticipated (and priced-in) rate cuts, which have increased market uncertainty and volatility in the past couple of weeks. If these continue, markets may need to adjust their expectations for monetary policy in the coming months. Unfortunately, that wasn’t what markets wanted to hear headed into a new year — and the major indexes all ended the week down significantly as a result.