The US economy experienced higher job growth in December, but we also saw an easing in wage growth.<\/p>\n\n\n\n
Despite lower wage growth, the surge in jobs caused markets to worry about the US economy running too hot.<\/p>\n\n\n\n
I think markets overreacted to the jobs report, since inflation expectations remain relatively well-anchored.<\/p>\n\n\n\n
On Friday, Jan. 10, we got what seemed like good news in the form of the December US jobs report. From my perspective, it was a Goldilocks jobs report \u2014 strong job growth without an accompanying increase in wage inflation \u2014 but the markets took a more negative view. I believe the downturn we saw following the report was an overreaction. In this column, I explain why.<\/p>\n\n\n\n
The US economy added 256,000 jobs in December, which was far better than expected and the most in nine months.1<\/a><\/sup> This followed the November jobs report, which was downwardly revised to a still-robust 212,000 from 227,000.2<\/a><\/sup><\/p>\n\n\n\n However, the December jobs report also showed an easing in wage growth; it\u2019s now back below 4% year-over-year.3<\/a><\/sup> High wage growth is arguably the most concerning contributor to inflation<\/a> because it can lead to sustainably higher inflation. Therefore, it is encouraging to see wage growth easing.<\/p>\n\n\n\n I frankly was surprised by the negative market reaction<\/a> \u2014 stocks and bonds both sold off after the report was released.4<\/a><\/sup> Despite lower wage growth, the surge in jobs caused more market concern about the economy running too hot and causing a resurgence in inflation. That could be because markets were already sensitive to the potential for elevated inflation:<\/p>\n\n\n\n Suffice it to say that the totality of releases and Fed voices last week resulted in a change in market expectations around rate cuts. A week ago, the CME FedWatch Tool indicated a 16% probability that the fed funds rate would stay at current levels for 2025; that probability has now increased to 31%.9<\/a><\/sup><\/p>\n\n\n\n I think markets overreacted to the jobs report. Both market-based and consumer survey-based inflation expectations remain relatively well-anchored:<\/p>\n\n\n\n We heard a similar story in Canada with the release of its December jobs report.<\/p>\n\n\n\n The Canadian jobs report also indicated that its economy is running hotter than expected \u2014 and just as in the US, this seemed to be a \u201cgood news is bad news\u201d story. Canadian bond yields rose and Canadian stocks fell on Friday10<\/a><\/sup> (of course some of that could be the spillover effects of the negative US market reaction). The report has lowered rate cut expectations for the Bank of Canada in 2025, but in my view, it seems more likely that it will continue easing materially this year.<\/p>\n\n\n\n The reality is that policymakers around the world are unsure of how this year will play out. The FOMC minutes noted that all participants <\/em>\u201cjudged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated.\u201d7<\/a><\/sup><\/p>\n\n\n\n Not only are policymakers unsure, investors are unsure \u2014 and so I anticipate a continued shifting of expectations around rate cuts as the year progresses \u2014 and a general uncertainty around what may happen to the global economy and markets. For example, we have seen an outsized sell-off in emerging markets that I believe has been driven largely by policy uncertainty and fear. I for one will stick with our base case for this year<\/a>, but will be vigilant about looking for risks to that scenario.<\/p>\n\n\n\n Because this year is shaping up to be an interesting and perhaps unusual one, I\u2019ve decided to start a financial glossary for 2025. Following are my initial contributions:<\/p>\n\n\n\n Arthur Burns has gone down in history as one of the most criticized Federal Reserve<\/a> Chairs because he presided over a dramatic increase in US inflation in the 1970s. Central bankers seem to fear being considered the next Arthur Burns more than they fear almost anything else. In my view, that has caused many to err on the side of worrying more about inflation than about recessions<\/a>. I think this syndrome caused many central banks, including the Fed, to dramatically hike rates in 2022. And there\u2019s a risk that policymakers in 2025 could act hawkishly out of fear of an inflation resurgence because they believe there\u2019s nothing worse than being another Arthur Burns.<\/p>\n\n\n\n Chances are, we all know someone who focuses on the negative in every situation \u2014 someone who can\u2019t appreciate a delicious meal, fun dinner companions, and great service at a restaurant because their chair has a slight wobble. Just like that pessimistic person, markets are likely to react negatively to positive economic news \u2014 as they did with Friday\u2019s US jobs report \u2014 because they\u2019ve decided that, especially in the US, inflationary risks are greater than economic growth risks.<\/p>\n\n\n\n When climbing mountains, significant health complications arise from high altitude sickness, which can be caused by ascending too quickly. Similarly, stocks can experience yield altitude sickness. When bond yields go up, especially quickly, they can exert downward pressure on stocks, as we have seen recently. And so I think it\u2019s appropriate to call the problems facing stocks when yields rise \u201chigh altitude sickness\u201d as well.<\/p>\n\n\n\n I prefer this term to \u201cbond vigilantes\u201c which seems more extreme. That\u2019s because I grew up in New York in the 1980s, so my mind automatically associates the word \u201cvigilante\u201d with the Guardian Angels \u2014 a group of volunteers who donned red berets and red silk jackets, and rode the subways in order to protect New Yorkers. Guardian Angels didn\u2019t carry weapons \u2014 their mere presence (and impactful fashion statement) was intended to keep the peace. Similarly, I think continued pressure on governments to be fiscally responsible may be enough, especially in the US, to keep spending in check and satisfy bond investors.<\/p>\n\n\n\n The \u201cOverton Window\u201d is a term used to describe the range of subjects and arguments that are considered politically acceptable to discuss and entertain by mainstream society at a given time. However, I think we\u2019re entering an era of greater extremism, which means the range of topics that people are willing to discuss and consider is likely to widen. We may soon need a garage door rather than just a window.<\/p>\n\n\n\n You may have heard the expression \u201cbeer goggles,\u201d which is a euphemism for when people have had too much to drink and everything suddenly looks better than it did before. In recent years, consumer sentiment in the US has been shaped by party affiliation; if one\u2019s political party is in power, one tends to be more positive on the economy and vice versa. For example, University of Michigan Surveys in recent years have shown that Republicans and Democrats have substantially different levels of consumer confidence that seem to be shaped by who is occupying the White House. And last week\u2019s Michigan consumer inflation expectations showed wildly different expectations for inflation in the coming year depending on political affiliation. Democratic respondents expected one-year ahead inflation to be 1.5% in October; that has now risen dramatically to 4.2%. And Republican respondents expected one-year ahead inflation to be 3.6% in October; that has fallen to an incredibly low 0.1% in the most recent survey.11<\/sup> I suspect the \u2018political goggles\u2019 phenomenon will become increasingly common in other countries this year.<\/p>\n\n\n\n Post-modern imperialism is a type of imperialism that is ideological in nature and aims to spread democracy. We have now entered an era in which countries have a renewed interest in real imperialism, adding physical land to their country for strategic defense reasons. Exhibit A: The incoming US administration\u2019s interest in Greenland and the Panama Canal.<\/p>\n\n\n\n I grew up hearing the term \u201cstocks took a bath today.\u201d As someone who appreciates cleanliness, I initially assumed that was a positive expression \u2014 only to find out that it was actually negative, referring to a significant loss of value. I don\u2019t think stocks will experience major sell-offs this year, but given uncertainty, especially around monetary policy easing, I expect periodic \u201cstock shvitzes\u201d (getting a little wet through steam baths) where stocks could experience more minor drops in value.<\/p>\n\n\n\n This is just the start of a 2025 macro\/market glossary. I will provide installments throughout the year and welcome contributions from readers.<\/p>\n\n\n\n We\u2019ll get a number of important data releases this week, including Consumer Price Indexes (CPI) in the US and UK, and the eurozone CPI will be released next week. These will be very important given heightened market concerns around the potential for a resurgence in inflation. In addition, the US Federal Reserve Beige Book will be released, which will give us insights into the state of the US economy and the risks to it.<\/p>\n\n\n\n —<\/p>\n\n\n\n Originally Posted January 14, 2025 <\/p>\n\n\n\nHow did markets react?<\/h2>\n\n\n\n
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Was the downturn an overreaction?<\/h2>\n\n\n\n
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Canadian jobs report tells a similar story<\/h2>\n\n\n\n
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Uncertainty abounds worldwide<\/h2>\n\n\n\n
New financial terms for a new year<\/h2>\n\n\n\n
Arthur Burns aversion syndrome<\/strong><\/h3>\n\n\n\n
Good news is bad news syndrome<\/strong><\/h3>\n\n\n\n
Government bond yield high altitude sickness<\/strong><\/h3>\n\n\n\n
Government deficit guardian angels<\/strong><\/h3>\n\n\n\n
Overton garage door<\/strong><\/h3>\n\n\n\n
Political goggles<\/strong><\/h3>\n\n\n\n
Post-post-modern imperialism<\/strong><\/h3>\n\n\n\n
Stock shvitz<\/strong><\/h3>\n\n\n\n
Looking ahead<\/h2>\n\n\n\n
Dates to watch<\/h4>\n\n\n\n
Date<\/strong><\/th> Report<\/strong><\/th> What it tells us<\/strong><\/th><\/tr> Jan. 13<\/td> NY Fed US Consumer Inflation Expectations<\/td> Tracks consumer expectations for US inflation.<\/td><\/tr> Jan. 14<\/td> Eurozone ZEW Economic Sentiment<\/td> Measures economic sentiment in the eurozone for the next six months.<\/td><\/tr> <\/td> China New Loans<\/td> Measures the change in the total value of outstanding bank loans issued to consumers and businesses.<\/td><\/tr> <\/td> NFIB US Small Business Optimism Index<\/td> Indicates the health of small businesses in the US.<\/td><\/tr> <\/td> US Producer Price Index<\/td> Measures the change in prices paid to producers of goods and services.<\/td><\/tr> <\/td> New Zealand Business Confidence<\/td> Tracks businesses\u2019 opinions on expectations for their business and the economy.<\/td><\/tr> <\/td> Korea Unemployment Rate<\/td> Indicates the health of the job market.<\/td><\/tr> Jan. 15<\/td> UK Consumer Price Index<\/td> Tracks the path of inflation.<\/td><\/tr> <\/td> UK Producer Price Index<\/td> Measures the change in prices paid to producers of goods and services<\/td><\/tr> <\/td> UK House Price Index<\/td> Indicates the health of the housing market.<\/td><\/tr> <\/td> US Consumer Price Index<\/td> Tracks the path of inflation.<\/td><\/tr> <\/td> Australia Unemployment Rate<\/td> Indicates the health of the job market.<\/td><\/tr> <\/td> People\u2019s Bank of China Loan Prime Rate<\/td> Tracks the path of interest rates.<\/td><\/tr> Jan. 16<\/td> UK Gross Domestic Product<\/td> Measures a region\u2019s economic activity.<\/td><\/tr> <\/td> UK Industrial Production<\/td> Indicates the economic health of the industrial sector.<\/td><\/tr> <\/td> Bank of England Credit Conditions Survey<\/td> Reports on trends and developments in credit conditions.<\/td><\/tr> <\/td> European Central Bank Account of Monetary Policy Meeting<\/td> Gives further insight into the central bank\u2019s decision-making process.<\/td><\/tr> <\/td> US Retail Sales<\/td> Indicates the health of the retail sector.<\/td><\/tr> <\/td> China Gross Domestic Product<\/td> Measures a region\u2019s economic activity.<\/td><\/tr> <\/td> China Retail Sales<\/td> Indicates the health of the retail sector.<\/td><\/tr> Jan. 17<\/td> UK Retail Sales<\/td> Indicates the health of the retail sector.<\/td><\/tr> <\/td> Eurozone Consumer Price Index<\/td> Tracks the path of inflation.<\/td><\/tr> <\/td> US Building Permits<\/td> Indicates the health of the construction industry.<\/td><\/tr> <\/td> US Housing Starts<\/td> Indicates the health of the housing market.<\/td><\/tr> <\/td> US Industrial Production<\/td> Indicates the economic health of the industrial sector.<\/td><\/tr> <\/td> US Federal Reserve Beige Book<\/td> Gathers anecdotal information on current economic conditions in Federal Reserve districts.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n