The U.Sstock market took a significant hit as the trading day closed on the 10th of the month, driven by robust non-farm payroll data and rising inflation expectations that have sparked a shift in the Federal Reserve's interest rate stanceThe three major indices opened lower and continued to trend downwards throughout the day, ultimately closing with substantial losses that have raised concerns among investors.

This pessimistic sentiment is compounded by forecasts suggesting that the probability of the Fed cutting rates in 2025 has markedly diminishedAnalysts from various research firms and market institutions believe that not only will there be no rate cuts in 2025, but the Fed may even find itself facing the possibility of another hikeThe day saw long-term U.STreasury yields spike, further cooling market enthusiasm and pushing the so-called fear index higher.

By the end of the trading session on that day, the Dow Jones Industrial Average plummeted by 696.75 points to a closing figure of 41,938.45, marking a drop of 1.63%. The S&P 500 index followed suit, falling 91.21 points to close at 5,827.04, a decrease of 1.54%. Moreover, the Nasdaq Composite Index experienced a loss of 317.25 points, closing at 19,161.63, also translating to a 1.63% decline

Within the sectors tracked by the S&P 500, it was noted that ten out of eleven sectors faced losses, with the real estate and financial sectors leading the way downwards with declines of 2.46% and 2.45%, respectivelyThe energy sector, on the other hand, managed a modest increase of 0.34%.

The Labor Department released a report that day confirming the addition of 256,000 non-farm jobs in February 2024, a figure that exceeded market expectations of 157,000 jobs by a considerable marginThe previous month's employment number was also revised downward from 227,000 to 212,000 jobsUnemployment for the month remained at 4.1%, showing a slight improvement from the anticipated and prior month's rate, both at 4.2%.

Additionally, the data indicated that the labor force participation rate in December 2024 stood steady at 62.5%. The average hourly wage saw an increase of 0.3% compared to the previous month, aligning with market expectations, although it was a slight drop from the 0.4% increase observed in November of the previous year.

The University of Michigan’s preliminary consumer confidence index for January registered at 73.2, below the market projection of 74.5 and a decline from December's closing figure of 74. The survey also highlighted an increase in inflation expectations among consumers, rising significantly from 2.8% in December to 3.3%, which is the highest level observed since May 2024, surpassing the pre-pandemic range of 2.3% to 3%.

The market responded robustly to the surprising non-farm data, as investor sentiment soured rapidly

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On a day already teetering under pressure, the positive job numbers took on a negative connotation, igniting strong reactions across foreign exchange, bond, and equity markets.

The bolstered job market statistics propelled bond yields upwards, placing additional pressure on the stock marketThe yield on the benchmark 10-year Treasury note climbed to nearly 4.8%, hitting its highest point since the end of 2023. Early indications on that day suggested a quick rise in the 10-year Treasury yield, which peaked above 4.78% during intra-day trading, concluding at 4.769% with an increase of 8.1 basis points.

Further analysing the situation, the CME Group’s FedWatch tool reported that the likelihood of the Fed maintaining its target interest rate range at 4.25%-4.5% on January 25, 2025, increased to 97.3%, a significant rise from the previous day's figure of 93.6%. The probability of the Fed holding rates steady during its March meeting jumped from 56.2% to 74.9% in just one day

Market participants now foresee only a single 0.25% rate cut in 2025, a stark reduction from prior forecasts.

In the wake of the market's dramatic downturn, the Chicago Board Options Exchange’s Volatility Index (commonly referred to as the “fear index”) soared to as high as 20.31 before closing the day at 17.7, reflecting a 10.4% increaseMarket analysts pointed out that seemingly positive news has begun to morph into negative developments, as rising long-term rates diminish the likelihood of interest cuts by the Fed in 2025, which in turn might pose challenges for U.Scorporations due to a stronger dollar.

Adam Turnquist, chief technical strategist at LPL Financial, noted that the fluctuations in interest rates were occurring too rapidly, inciting a stock market sell-offThe recent trajectory of Treasury yields suggests that the S&P 500 might experience a downturn or correction soon.

While the consensus among many is that the Fed will not slash rates any further in 2025, the robust employment data and surging inflation expectations have solidified this outlook for more market officials and research firms

Jeremy Siegel, a professor emeritus at the Wharton School of Business, remarked that the prevailing belief is that the Fed is unlikely to pursue further cuts, and that the 10-year Treasury yield could easily surpass 5% if the trend continues.

Siegel asserted that effectively all rate-cut expectations have been eliminated and pointed to historical patterns where such a scenario typically correlates with rising long-term interest ratesFollowing the release of the non-farm payroll data, economists from Bank of America expressed in a research note that given the resilient labor market, they now believe the cycle of interest rate cuts by the Fed has essentially come to an end.

Despite an anticipated adjustment of the non-farm payroll figures in March 2024 that could reduce the job count by about 1 million starting from April 2023, they maintain that the prevailing narrative is a stabilization of the job market.

Economists from Bank of America predict that the Fed will hold rates steady for an extended period moving forward, with the next potential adjustment being an increase

They highlighted the critical factor now lies in determining the threshold for future rate hikes; if the core Personal Consumption Expenditures Price Index sees year-on-year growth topping 3% or if long-term inflation expectations decouple from their anchored levels, hikes could indeed become an option.

In the midst of the evident market pressures, there remain positive voices and factors within the marketsAlthough the U.Sstock market has faced consecutive declines in recent sessions, expectations for a rebound have started to materialize as well.

Turnquist indicated that amidst the day’s downturn, one crucial piece of data appeared overlooked: the reason for rising interest rates rests in better-than-expected economic performance, which ultimately translates into better corporate earnings and reduced recession risks—a sentiment that could lead to stronger long-term investment returns despite immediate sell-off reactions.

Austin Goolsbee, President of the Federal Reserve Bank of Chicago, commented on the latest employment report, conveying that the labor market is stabilizing around full employment, but he doesn't see it as indicative of an overheating economy

He stated, "I do not believe the labor market is the source of inflation." If current expectations hold, he predicts that interest rates in the U.Scould significantly lower within the next 12 to 18 months.

Despite these positive notes, Scott Ren, Senior Global Market Strategist at Wells Fargo, conveyed that, at least for the present, good economic news isn’t exactly mischievous for the marketsHe reiterated that even with the unexpected rise in non-farm job additions, Wells Fargo maintains its contention that the U.Slabor market might face a further slowdown in the coming quarters.

As investors navigate the market pressures, they did find some solace in encouraging corporate earnings reports, providing a somewhat positive start to the new yearWalgreens Boots Alliance surged to a staggering increase of 27.55% following an earnings beat for its first quarterDelta Air Lines witnessed over a 9% rise as it reported record travel activity and surpassed earnings expectations for the fourth quarter, marking its highest annual revenue to date.

Alongside these developments, investors are also keenly observing the economic impacts stemming from devastating fires in Los Angeles, which have placed pressure on insurance and utility stocks