(Bloomberg) — Stocks were hit hard and bond yields rose along with the dollar, with traders lowering their bets on Federal Reserve rate cuts this year after a booming jobs report.
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Stocks reversed their gains in 2025, with the S&P 500 down nearly 2% and breaching a key technical level. Due to a fall in government bonds, the 30-year interest rate briefly rose above 5%. The dollar rose against most of its major peers. Swaps are pricing in about 30 basis points of total Fed cuts this year, up from nearly 40 basis points earlier Friday. Oil prices soared – raising concerns about inflation – as the US imposed aggressive sanctions on Russia’s energy industry.
The US economy added the most jobs since March in December and the unemployment rate fell unexpectedly, capping off a surprisingly strong year. Separate data fueled concerns about persistent price pressures, with consumers’ longer-term inflation expectations rising to their highest level since 2008.
“Investors may want to brace for more volatility as the market recalibrates expectations for fewer cuts,” said Gina Bolvin of Bolvin Wealth Management Group.
The S&P 500 fell 1.8%, breaching its 100-day moving average. The Nasdaq 100 fell 2.1%. The Dow Jones Industrial Average fell 1.7%. A gauge for the “Magnificent Seven” megacaps fell 1.8%. The Russell 2000 index of small companies lost 2.7%. Wall Street’s favorite volatility gauge – the VIX – rose to around 20.
The yield on ten-year government bonds rose by seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.
“The main question now is how much pressure the markets can withstand before capitulating,” said Florian Ielpo of Lombard Odier Investment Managers.
Economists at some major banks have revised their forecasts for additional Fed rate cuts in response to stronger-than-expected employment data.
Bank of America Corp., which expected a two-quarter-point cut earlier this year, doesn’t expect any more cuts and said there is a risk the next step will be a rate hike. Citigroup Inc. — whose rate cut prospects are among Wall Street’s most hopeful — still expects a five-quarter-point rate cut but says they will begin in May. Goldman Sachs Group Inc. will see two cuts this year instead of three.
“The Fed can safely remain in January and will need some meaningful downward inflation surprises or reversals in the upcoming jobs reports to pull them out of the March rate slumber,” said Seema Shah of Principal Asset Management. “For global bonds, the strength of the US jobs report only adds to the challenges. The peak for yields has not yet been reached.”