Happy Monday! This morning we’re unpacking the latest hot jobs report and what it means for the Fed, economy and investors — then we’ll get into how the bond market could derail stocks. First time reading? Join 190,000 self-directed investors gaining an edge every morning. Sign up here. 

Economic momentum is accelerating

It’s weird to think that the US economy could be too strong.

But that’s the takeaway according to how markets reacted to Friday’s jobs report, which at face value showed more hiring, rising wages, and more adults joining the workforce. 

Each of the three major stock indexes turned red after the Bureau of Labor Statistics reported the country added 256,000 jobs in December, higher than the expected 155,000.

The unemployment rate dipped to 4.1%, also slightly lower than forecasted.

To be clear, this is good news for job hunters and hoppers.

However, it makes the outlook for the Federal Reserve murkier, and effectively takes rate cuts off the table for January and March.

After the news, Goldman Sachs and JPMorgan each lowered their outlook from three cuts to two. Bank of America, meanwhile, said the odds are higher that the Fed’s next move is higher, not lower.

“The December jobs report was gangbusters,” said BofA strategist Aditya Bhave, adding that even if the employment data gets revised later on, it won’t likely move the needle on policy. 

“Given a resilient labor market, we now think the Fed cutting cycle is over,” Bhave said.

UBS, meanwhile, maintained its call for two rate cuts this year. 

“Given the overall strength of the recent economic data, there is little reason for the Fed to consider cutting rates anytime soon,” Brian Rose, senior US economist for UBS Global Wealth Management, said Friday. 

On the prediction platform Kalshi, odds for zero rate cuts this year spiked 13 points to 28% immediately following the jobs report. On Sunday, those odds dipped to 23%.

One thing to remember here: If the case for Fed rate cuts is getting worse, that means the Fed is further from its unspoken goal of weakening the economy. 

Policymakers can’t exactly say that out loud, yet when they explain why they cannot lower interest rates, it means that nothing in the economy has broken badly enough to justify loosening financial conditions.  

“The bottom line is that momentum in the economy is strong, and the narrative that monetary policy is restrictive is wrong,” said Apollo chief economist Torsten Slok. His team sees a 40% probability that the Fed hikes rates in 2025.

For what it’s worth, the Misery Index — which adds inflation to the unemployment rate — is expected to climb for the fifth consecutive month in December, based on the forecast for CPI to accelerate to 2.9% year-over-year.

As the Misery Index suggests, everyday Americans take the brunt of the pain.

Early readings from the University of Michigan’s consumer sentiment survey show an unexpected decline for January, ending a six-month streak of gains. 

At the same time, expectations for year-ahead business conditions dropped to an eight-month low, and personal finance expectations hit its lowest level in five months.

“When it comes to the economy, consumer views remain downbeat and, in fact, appear to have soured dramatically,” said Marius Jongstra, a strategist at Rosenberg Research.

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Elsewhere:

📊 Bonds versus stocks. Equity traders have shrugged off warnings from the Treasury market for months, but that may change with yields climbing toward the key psychological of 5%. Yields on the policy-sensitive 10-year note is at its highest level since October 2023, and if it breaches 5% some analysts fear it could spark a stock correction. (Bloomberg)

🚒 The LA fires continue to burn. Firefighters battled blazes across Southern California all weekend in the deadly fire that’s estimated to have killed at least 16 people and destroyed thousands of homes. Severe fire conditions are expected to carry on through Wednesday, with massive winds and dry atmosphere. (CNBC)

Rapid-fire:

• If a recession hit Europe, it would negatively impact US stocks because 41% of revenues in the S&P 500 comes from abroad (Apollo)

• JPMorgan’s Jamie Dimon said tariffs can help resolve unfair competition and national security issues (Bloomberg)

• Warren Buffett is preparing his middle child Howie Buffett to become non-executive chairman at Berkshire Hathaway (WSJ)

• Nine once-hot economic metrics that have cooled off (Yahoo Finance)

• Tech analyst Gene Munster expects the tech bubble to burst in two years (Business Insider)

• Mark Zuckerberg said Apple hasn’t invented anything great in the nearly two decades since Steve Jobs created the iPhone (CNBC)

• The Consumer Financial Protection Bureau is still rolling out splashy, controversial new regulations even as Joe Biden prepares to exit the White House (Yahoo Finance)

Last thing:

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