🚨 US Employment Strength and Retreating Rate Cut Expectations

Today Korean Economic News | 2025.01.12

📌 US Employment Strength Lowers Rate Cut Expectations↓... New York Stock Market Also Tense

💬 As US employment strength has caused rate cut expectations to retreat, large technology stocks showed weakness in the New York stock market. US Treasury yields surged, and with the Federal Reserve (Fed) expected to keep rates unchanged for the time being, the financial markets are under pressure.

1️⃣ Easy to Understand

As signals emerge that the US economy is stronger than expected, the market is becoming tense. This may seem contradictory at first glance, but it demonstrates the complex relationship between economic conditions and financial markets.

Using an everyday analogy, the US economy is like 'a patient whose health condition is so good that plans to reduce medication are being postponed.' Here, the 'medication' is high interest rates. For the central bank to reduce this 'medication' (lower interest rates), signs of a slight economic slowdown are needed, but recently released employment indicators showed that the US economy is still robust.

As a result, investors have come to believe that rate cuts will be delayed longer than expected, which is putting pressure on the stock market, especially technology stocks that are sensitive to high interest rates. It's similar to how a patient's family would worry upon hearing that medication costs will remain high for the time being.

2️⃣ Economic Terms

📕 Employment Data

Employment indicators are statistical data showing the labor market conditions of the economy.

• Major indicators include non-farm payroll increases, unemployment rate, and hourly average wage growth.
• They are important measures for diagnosing the health of the economy and directly affect consumer spending power and inflation.

📕 Rate Cut

A rate cut refers to a monetary policy decision where the central bank lowers the benchmark interest rate.

• It is generally implemented to stimulate economic growth and promote consumption and investment.
• It is typically implemented when signs of economic slowdown appear and generally has a positive effect on the stock market.

📕 Treasury Yield

Treasury yield refers to the investment return on bonds issued by the government.

• It is influenced by interest rate forecasts, inflation expectations, and economic growth projections.
• When yields rise, bond prices fall, which also affects the stock market.

📕 Federal Reserve System

The Federal Reserve System is the central banking system of the United States, the institution that determines monetary policy.

• It performs the dual mandate of price stability and full employment, with interest rate adjustments being a key policy tool.
• The Federal Open Market Committee (FOMC) meets regularly to make interest rate decisions.

3️⃣ Principles and Economic Outlook

💡 Relationship Between Employment Indicators and Interest Rate Policy

• Recently released US employment indicators showed strength beyond expectations. This suggests that the US economy is still maintaining resilience even in a high-interest-rate environment. Generally, central banks lower interest rates when the economy slows down and unemployment rises, but the current strength in the job market reduces this necessity. Particularly if wage growth rates remain high, this could lead to inflationary pressure, making it likely that the Fed will not rush to cut rates. Market experts analyze that the March rate cut initially expected could be delayed to May or June.

💡 Impact of Rising Treasury Yields

• US 10-year Treasury yields surged following the release of employment data. This means market participants are pushing back the timing of rate cuts. Rising Treasury yields have various impacts on different economic actors. Businesses may feel burdened in investment and growth due to higher funding costs. Consumers may see reduced home purchasing power due to rising mortgage rates. Also, bond investors may experience short-term valuation losses but can expect higher yields on new investments. It's particularly noteworthy that if the high-interest environment persists, it could lead to dollar strength, which could have additional impacts on the global economy.

💡 Stock Market Reaction and Industry-Specific Impact

• The New York stock market showed a downward trend after the employment data release, with particular weakness in large technology stocks. This is because a high-interest environment negatively affects growth stocks that depend on future cash flows. On the other hand, financial stocks may perform relatively well as high interest rates can positively affect interest income. Also, cyclical and value stocks may perform better in this environment. Overall, the market may experience sector rotation due to changes in interest rate outlook, and investors may consider portfolio adjustments accordingly. However, the still-solid economic fundamentals act as a factor reducing the possibility of a major market correction.

4️⃣ In Conclusion

The strength of the US job market is a positive signal showing economic resilience, but by delaying rate cut expectations, it is temporarily burdening financial markets. This shows the paradoxical situation that the economy and financial markets do not always move in the same direction.

Investors need to readjust their investment strategies according to the changing interest rate environment. Particularly, portfolios concentrated in high-growth technology stocks may need to be diversified across various sectors to reduce risk. It's time to consider increasing allocation to financial stocks, cyclical stocks, and value stocks.

From a long-term perspective, the robustness of the US economy is a positive factor for corporate profits and the stock market, but uncertainty in the interest rate path could increase short-term volatility. It's important to maintain a flexible stance in response to market changes while paying attention to the Fed's monetary policy decisions and upcoming economic data releases.

Additionally, as US economic and interest rate policies have a significant impact on global markets, domestic investors also need to monitor these changes. Particularly if dollar strength persists, investment strategies that consider the impact on emerging markets and commodity prices are required.

Ultimately, employment strength and delayed rate cuts can be interpreted as signals that the economic foundation is strengthening, and short-term market corrections may actually provide entry opportunities for long-term investors. However, as market conditions can change rapidly depending on inflation trends and the Fed's policy direction, it is important at this juncture to closely observe economic indicators and policy decisions.