1. Fed Likely to Pause Next Week
Inflation remains elevated, with December CPI rising to 2.9%, marking its highest reading since July. Core CPI, excluding food and energy, rose 3.25%, signaling continued pressure above the Fed’s 2% target. Additionally, producer prices saw a 3% year-over-year increase, the sharpest rise since February 2023. With inflation stubbornly high, markets have priced in a 99.5% probability that the Fed will pause at its meeting next week, aligning with its historical tendency to follow market expectations. However, the pace of rate cuts in 2025 is uncertain, hinging on future inflation data and economic strength.
Key Takeaway: Markets expect the Fed to pause, but the path forward remains data-dependent.
2. Job Market Streak Continues
December saw 256,000 jobs added, far exceeding the consensus estimate of 157,000, marking 48 consecutive months of job growth—a tie for the second-longest streak in U.S. history. The unemployment rate dipped to 4.1%, well below the historical average of 5.7%. Industries including healthcare and construction led recent job gains.
Key Takeaway: The labor market remains robust, providing resilience to the U.S. economy.
3. Nasdaq 100’s Historic Run
The Nasdaq 100 has now closed above its 200-day moving average for 466 straight trading days, its second-longest streak. The “Magnificent Seven” stocks—Apple, Nvidia, Microsoft, and others—continue to dominate global equity markets. Together, these seven companies hold an 18.6% weighting in the global equity market, outpacing the combined weightings of Japan, the UK, and Canada.
Key Takeaway: Concentrated tech leadership underscores both opportunity and risk in equity markets.
4. Mounting U.S. Deficit and Debt Challenges
The federal budget deficit ended 2024 at over $2 trillion, driven by rising government spending and higher interest costs on debt. Interest expenses reached a record $1.15 trillion in 2024, now surpassing the national defense budget. With interest rates elevated, fiscal pressure is expected to persist.
Key Takeaway: Rising debt costs present long-term challenges for fiscal sustainability.
5. Bond Market Prospects Improve
While stocks and bonds showed record-high correlations in recent years (0.73), the bond market now appears better positioned for future returns. The 10-year Treasury yield closed 2024 at 4.61%, its highest year-end yield since 2006. Historically, starting yields have shown a 97% correlation with future bond returns, indicating a more favorable outlook for fixed-income investors moving forward.
Key Takeaway: Bonds offer improved diversification potential and stronger future returns.
6. Rising Real Wages and Small Business Optimism
Real wages grew for the 20th consecutive month in December, signaling stronger purchasing power for consumers. Additionally, small business optimism hit its highest level since 2018, with 52% of surveyed owners expecting the economy to improve—the highest percentage since 1983.
Key Takeaway: Economic sentiment and rising wages provide support for domestic growth.
7. Energy Markets See Renewed Momentum
Crude oil prices surged over 4% last week, closing at $74 per barrel—its highest since mid-October. While year-over-year price changes remain stable, supply concerns have brought renewed attention to energy markets.
Key Takeaway: Oil markets could face increased volatility in 2025 amid supply-side pressures.
Looking ahead, the market will focus on next week’s Fed meeting, along with the December employment report and early Q4 earnings announcements.
