Market Sentiment Turns Negative as Strong Jobs Report Raises Inflation Concerns

The market had a rough start to the new year, with strong non-farm payroll data showing December's employment growth reaching 256,000 (market expectation was +165,000) and the unemployment rate dropping to 4.1% (expected 4.2%). This caused U.S. Treasury yields to rise by about 10 basis points at one point, with long-term yields touching around 5%, leading to a 1.5% drop in U.S. stocks, while the dollar strengthened, oil prices rose by 3%, and cryptocurrencies remained flat after correcting about 5% in the previous trading days.

The December employment report exceeded all investment banks' expectations, showing a significant increase of 478,000 in household survey employment, a surge in young workers in part-time jobs, and an average hourly wage growth of 3.9% year-on-year, far above the low of 3.6% in July, suggesting that price pressures may return, which has been a major concern for the Federal Reserve recently.

Bond yields exhibited a bear steepening trend, with the 10-year yield reaching 4.74% and the 30-year yield approaching 5%, hitting a nearly 12-month high. Additionally, the economy remains strong, and traders' expectations for rate cuts in 2025 quickly dropped from nearly three times to just once, making the Fed's dovish turn last September appear to be a policy misstep.

As a result, the stock market came under pressure, with declines in the U.S., UK, Japan, and Chinese markets, although the reasons varied. The U.S. and UK markets were hindered by rapidly rising bond yields and financing costs, Japan was punished for the central bank's sluggishness in raising interest rates and controlling inflation, while China faced the opposite problem, disappointing the market due to economic slowdown from deflation and a lack of concrete stimulus measures.

In China, the CSI 300 index fell over 5% in its first week of trading, marking the worst annual start since 2016. Concerns over tariff and sanction risks (with Tencent being the latest target), coupled with disappointment over policies, have led to a 20% decline in the Chinese stock market since its peak in October. Furthermore, domestic yields have dropped to historical lows, and the renminbi has weakened, further dampening risk sentiment, with no clear signs of an end in sight.

This week's focus will be on CPI and earnings reports, with the market having relatively good expectations for both. Overall CPI is expected to remain below 3%, and the breakeven inflation rate remains stable. However, preliminary inflation expectations from the University of Michigan have risen, combined with strong wage growth, which may tilt the risk balance upward, posing significant challenges to current market sentiment.

After the CPI announcement, the earnings season will officially begin, with financial and large tech stocks potentially facing additional pressure. On the policy front, there will be press conferences from the People's Bank of China and the State Administration of Foreign Exchange, speeches from Federal Reserve officials, and comments from Bank of Japan Governor Himino, which the market will use to determine the future path of monetary and fiscal policy.

In the cryptocurrency space, prices fell about 5-10% over the week, with BTC performing relatively well. Reports last week indicated that the U.S. Department of Justice was authorized to liquidate BTC seized in the Silk Road case (totaling $6.5 billion), providing the market with a reason to sell, while also raising a question: If the government is serious about cryptocurrency, why not directly include this BTC in the "BTC reserves"?

ETFs saw net inflows starting last Monday, but significant sell-offs occurred in the latter half of the week, with over $700 million flowing out since Wednesday. The total amount of futures long liquidations reached around $1 billion, nearing the scale seen in November and December.

A recent survey by Citigroup (targeted at its TradFi clients) showed that respondents generally expect BTC prices to rise in 2025, with most anticipating prices to be in the range of $100,000 to $200,000 by the end of the year. Does price move with sentiment, or does sentiment change with price? We will soon find out the answer!