Markets Signal Stability as Labor, Inflation, and Rates Hold Their Ground

Matthew Rubin Chief Investment Officer

 

1. New claims edged higher but stayed below expectations, reinforcing signs of a stable, low-turnover labor market.
2. Inflation data met expectations last week, supporting a wait-and-see approach to future policy moves.
3. Government bond yields edged lower last week as risk concerns softened and attention shifted toward upcoming Fed decisions.

 

1. Labor Market Steady as Claims Undershoot Forecasts

Initial jobless claims rose slightly last week from 199,000 to 200,000, but below expectations for an increase to 207,000.¹ The muted uptick suggests layoffs remained contained, even as hiring activity continued at a slower-than-normal pace. At the same time, continuing claims declined to 1.85 million, contrary to forecasts for a modest increase.¹ This drop indicates fewer workers remained on unemployment rolls, reinforcing the view that job separations stayed limited.

Broader labor market indicators told a similar story. The unemployment rate held at 4.4%, a level consistent with a relatively healthy employment backdrop.¹ Job openings eased from roughly 7.5 million to 7.1 million in November, signaling softer demand for new workers but not a sharp pullback.¹ Together, these data point to a labor market characterized by low hiring and low firing. We anticipate that this balance is likely to persist, helping gradually reduce wage pressures and supporting further moderation in inflation without a material rise in unemployment.

2. Inflation Measures Hold Steady as Policymakers Weigh Next Steps

The Federal Reserve’s preferred inflation gauge showed little change last week, in line with expectations. Headline personal consumption expenditure (PCE) inflation held at a 2.8% annualized pace in November.² Specifically, goods prices continued to rise gradually, increasing 1.4% from a year earlier, which helped offset slower but still-elevated services inflation.² Services price inflation eased further but remained at 3.4%, reflecting lingering pressures in areas tied to labor costs.²

Shelter inflation slowed to a 3.3% pace, an important development given its outsized role in services inflation.² Core PCE inflation, which excludes food and energy, held steady at 2.8%, also matching forecasts.² While these readings suggested inflation continued to move sideways rather than higher, it still remains above the Federal Reserve’s 2% objective. Against this backdrop, policymakers appear positioned to pause rate cuts for the next few months while monitoring incoming data. A stabilizing labor market provides additional room to assess whether price pressures continued to ease.

3. Treasury Yields Ease as Market Uncertainty Moderates

Treasury yields finished last week modestly lower as investors reassessed the outlook for economic growth and near-term risks. The 10-year Treasury yield declined by just over two basis points to 4.23%, while the 30-year yield fell more than three basis points to 4.82%.³ Shorter-term rates moved less, with the two-year Treasury yield dipping slightly to around 3.61%.³ Because bond prices and yields move in opposite directions, these changes reflected steady demand for Treasuries late in the week.

Market sentiment improved as concerns about trade and geopolitical tensions eased, reducing the need for risk premiums in longer-dated bonds. With little new economic data released, investors focused on upcoming policy signals rather than on fresh indicators. Attention increasingly turned to the Fed’s interest-rate decision scheduled for later this month, with expectations that the Federal Open Market Committee will hold rates steady.

Looking ahead, markets continue to price in a small number of rate cuts over the longer term, though recent labor market resilience suggested limited urgency for near-term easing. Mixed economic signals left investors cautious, with bond markets remaining sensitive to incoming data.

For the period ending 1/23/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Bureau of Labor Statistics
² U.S. Bureau of Economic Analysis
³ FactSet

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