An overview of the upcoming day in U.S. and international markets from Mike Dolan.
Wall Street’s S&P 500 index has nearly erased its post-election gains, impacted by bond markets concerned about a resurgence of inflation and interest rates if President-elect Donald Trump’s incoming administration fuels the already robust economy.
As the fourth-quarter corporate earnings season is set to kick off on Wednesday, the S&P 500 recorded an additional 2% decline for the week, closing on Friday at less than 1% from its level on polling day, November 5.
With bond yields and the dollar still restless early Monday, S&P 500 futures have dropped 1% ahead of market opening, while the VIX ‘fear index’ surpassed 22 for the first time this year—also returning to where it was on election day.
The latest concern in the turbulent new year market arose from seemingly positive news, particularly a strong U.S. employment report where job growth outpaced predictions and the unemployment rate declined. This indicates that any lingering worries from the Federal Reserve regarding a weakening labor market have lessened significantly.
If the job sector is holding steady or tightening, the Fed—and the Treasury bond market—must now evaluate the risks of a resurgence of inflation that remains above targeted levels.
This is especially pertinent as Trump’s plans for deporting illegal immigrants, along with tax cuts and tariff increases, are expected to exacerbate the overall wage and price climate while potentially heightening public debt concerns.
Trump’s inauguration next week is now viewed as a critical market moment, with his nomination for Treasury Secretary, Scott Bessent, scheduled for Senate confirmation hearing this Thursday.
However, we will receive a solid reality check on inflation with the release of the December consumer price report on Wednesday, while Monday’s New York Fed survey of consumer inflation expectations will serve as a prelude.
With not even a single full Fed rate cut priced into futures markets for the entire year, the interest rate market is now speculating that the easing cycle by the Fed may have concluded after just 1 percentage point decrease—some are even starting to discuss the possibility of rates rising again from this point.
The Treasury market has been on edge for over a month, with benchmark 10-year yields surpassing 4.8% early Monday for the first time since late 2023—more than 40 basis points above the Fed policy rate.
In an unusual occurrence, the 10-year yields have now surged 115 basis points since the Fed initiated easing in September.
Two-year yields have jumped to 4.4% for the first time since July.
The dollar index continues to gain momentum, reaching its highest level since 2022 early Monday.
Further complicating the price situation has been a rise in U.S. crude oil prices, which reached their highest point since August on Monday, with year-on-year increases of 8% being the largest since July.
This recent uptick came amid expectations that broader U.S. sanctions will impact Russian crude supplies to the world’s top two importers, China and India.
On Friday, the U.S. Treasury enforced sanctions on Russian oil producers Gazprom Neft and Surgutneftegas, along with 183 vessels that have transported Russian oil, targeting revenue that Moscow utilizes to finance its war with Ukraine.
Analysts believe that Russian oil exports will suffer significantly from these new sanctions, forcing major buyers China and India to procure more oil from the Middle East, Africa, and the Americas, which will drive up prices and shipping expenses.
As the dollar climbs globally, reflecting some of those crude oil restrictions, India’s rupee notably experienced its largest single-day drop in two years, hitting another record low on Monday.
