Strong Economy With Too Many Jobs

Good Afternoon. It was a down week for the markets. The market sold off, especially after Friday’s excellent job report, which showed that the US job growth hit 9 months high.

Source: NY Times

Important things to note this week:

• Risk of downward data revisions: 

  • The official job report showed that the US economy added more than expected 156k jobs in December, and the unemployment rate also fell to 4.1%.

  • The ADP report, which comes 2 days before the official DOL report, missed the forecast (122k vs 139k). So, we have a conflicting reading between the private vs. official versions.

  • In addition, there is always a risk of downward data revisions in the official numbers based on recent history. Hence, it’s risky to focus too much on one data point. Overall, macro data shows that the US economy is doing great.

    

    Source: Macro Bond

• Mortgage rates continued to increase this week, crushing the demand for mortgage applications even more.

• The services sector continues to shine based on the numbers reported on Tuesday.

• According to the United Nations, the global economy will grow modestly at 2.8% in 2025.

• Vice-chair for supervision, Michael Barr, announced he would step down from the role by the end of February. This is perceived as good for the banks. Barr was instrumental in the Basel III endgame proposal, which was opposed by the banks. I don’t believe in self-regulation. Balanced regulation is essential in all critical sectors—more on this in the curated insights section.

• Next week kicks off Bank earnings.

For the week:

• The S&P 500 is down 1.9%, the Nasdaq is down 2.3%, and the Dow 30 is down 1.9%.

CNN's Fear & Greed Index now stands at 27(Fear) out of 100, down 5 points from last week. Details here

The top five trending stocks on Reddit are AMD, SPY, Nvidia, Tesla, and Microvast. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for Jan 29th FOMC Meeting:

CME FedWatch: * Data as of 10 Jan 2025 08:30:06 CT

Meta Ends Fact Checking: Meta will replace its third-party fact-checking program with a "Community Notes" model, mirroring the approach used on Elon Musk’s X. CEO Mark Zuckerberg announced the return of political content and the removal of restrictions on topics such as immigration and gender. Read

Trump Announces Investment For Data Centers: President-elect Donald Trump unveiled a $20 billion foreign investment plan to construct new data centers across the United States. Read

Michael Barr Steps Down: Vice-chair for supervision Michael Barr will step down on February 28 but will remain as a governor. Addressing speculation about his potential replacement by President-elect Donald Trump, Barr stated that avoiding a dispute over the role would prevent distractions from the Fed's mission. Read

New Bitcoin ETFs Coming In 2025: Calamos, an asset manager, announced plans to launch a structured protection ETF designed to expose investors to Bitcoin's potential upside while ensuring complete downside protection. Read

New Nvidia PC Chips: Nvidia announced new desktop and laptop PC chips leveraging the Blackwell architecture that powers its fastest AI processors for servers and data centers. Laptops with new chips are expected to start shipping in March. Read

Prada Aims Versace: Italian fashion brand Prada is reportedly considering acquiring the Versace label, according to Il Sole 24 Ore. The report noted that the luxury house is working with adviser Citi to assess the potential deal, citing market speculation. Read

Jefferies Beat: Jefferies Financial’s profit more than tripled in Q4, driven by higher advisory fees and robust underwriting activity. Buoyant markets, declining interest rates, and expectations of lighter regulation under the incoming Trump administration bolstered corporate enthusiasm for M&A, while equity and debt offerings surged in H2 2024. Read

Constellation Brands Miss: Constellation Brands lowered its annual sales and profit forecasts after weaker-than-expected consumer demand for Modelo Oro and Corona Light, which led to a third-quarter earnings miss. Read

Importance of Regulation: As discussed above, Banks are expected to benefit from the departure of Michael Barr. He was behind the Basel III endgame proposal, which the banks criticized as too restrictive. Barr himself scaled back from his initial proposal a while back and accepted that maybe his initial proposal was overkill. I covered this in my newsletter on Sep 15th. However, banks were not completely happy even with the new proposal. It’s natural for the industry to push back on regulation, and balance is necessary. We will have to see how his replacement handles these issues.

Last year, I covered this topic in my blog - “Importance Of Regulation.” I covered three examples where either there was a lack of regulation or regulation was rolled back due to industry pressures. All these examples show that self-regulation or poor regulation/supervision has severe bad outcomes -

• Collapse of crypto exchange FTX

• Explosion of Oceangate’s Titanic Submarine

• Collapse of Silicon Valley Bank
  

Global Corporate Investments In AI:
Very insightful data from the latest United Nations report highlights US dominance in AI:

Key Points From The FOMC Meeting Minutes:

• Liquidity in Treasury markets deteriorated somewhat following the U.S. election but remained well within the ranges observed over the past three years.

• There were few signs of concern about persistent inflationary pressures in market prices.

• The average estimate of survey respondents for the timing of the end of balance sheet runoff shifted a bit later, to June 2025.

• Widening between U.S. and foreign interest rates appeared to be a major contributor to the increase in the trade-weighted U.S. dollar index observed over the inter-meeting period.

• Pricing in the federal funds market continued to be insensitive to day-to-day changes in the supply of reserves over the interim-meeting period.

• Consumer price inflation was below its year-earlier rate but was still somewhat elevated.

• Labor market conditions had eased slightly further but remained solid.

• Real private domestic final purchases (PDFP)—comprising PCE and private fixed investment and often provide a better signal than GDP of underlying economic momentum—rose faster than real GDP in the third quarter.

• Communications by Federal Reserve officials contributed to investors’ perceptions of a slower timeline for policy rate reductions.

• For small businesses, credit availability remained relatively tight.

• Inflation in 2025 was expected to remain at about the same rate as in 2024, as the effects of the staff’s placeholder trade policy assumptions held inflation up. Thereafter, inflation was forecast to decline to 2 percent by 2027, the same as in the projection at the November meeting.

• The strength of economic activity was unlikely to be a source of upward inflation pressures.