A hotter-than-expected December jobs report sent the Dow Jones Industrial Average tumbling by more than 600 points (1.5%) on Friday morning as U.S. Treasury yields continued to rise and inflation concerns took center stage. Most sectors struggled, including financials.
Shares of Wells Fargo (WFC +0.20%) were trading 2.6% lower as of 11:46 a.m. ET, while investment bank Jefferies Financial (JEF +3.29%) was off by 11.4% and private equity giant Blackstone (BX +0.74%) was down by roughly 5%.
Yields, jobs, and yields again
Since mid-December, investors have grown increasingly concerned about sticky inflation, an issue that is also top of mind for the Federal Reserve. The Fed has pared back its forecast for interest rate cuts in 2025 from four to two. The market is even more pessimistic on the outlook for rate cuts, and Friday's jobs report didn't help. Nonfarm payrolls in December added 256,000 jobs, 100,000 more than the Dow Jones consensus, and up from 212,000 in November. If there was a silver lining in that jobs report, it would be that hourly wages grew 0.3% from the prior month, in line with expectations. Hourly wages grew 3.9% year over year, slightly below estimates.
Traders betting on how the Fed will deal with the federal funds rate now see virtually no chance of a rate cut in January, and 75% of traders think the Fed will leave rates unchanged in March as well. About 40% of traders only expect one rate cut in 2025.
"The surprisingly strong jobs report certainly isn't going to make the Fed less hawkish," Morgan Stanley Chief Economic Strategist Ellen Zentner told CNBC. "All eyes will now turn to next week's inflation data, but even a downside surprise in those numbers probably won't be enough to get the Fed to cut rates any time soon."
There wasn't much company-specific news Friday in the sector, but higher interest rates can have several consequences for banks and financial institutions. Prominent among them, they increase the cost of deposits and renew credit concerns, particularly for commercial real estate loans. Blackstone has many real estate investments, and their borrowing costs increase when rates are higher, which could put a dent in valuations. Additionally, higher rates and more volatility can spell trouble for investment banking activity, which investors in the sector are hoping will rebound this year.
NYSE: JEF
Key Data Points
Jefferies is a pure-play investment bank. On Wednesday, it reported earnings that were up 200% from the same period a year ago, powered by a rebound in deal-making, so perhaps activity will still improve this year. However, the high interest rate environment has hindered deal-making and initial public offerings over the last few years. The persistence of higher rates for longer could put the brakes on that activity.
On the bright side...
I'm still optimistic about the outlook for financials this year. Yes, market rates on Treasuries are going up, but the yield curve is still steepening, which is a nice change from the past few years and should help bank margins. Furthermore, President-elect Donald Trump's administration should be more favorable for banks, with looser regulation and less stringent capital requirements, and with regulatory agencies run by appointees who will be more quick to approve bank acquisitions.
Investors should remember that the outlook for interest rates can change quickly. Next week, new inflation data will come out, and a weak reading may help bring yields down a bit. It's also better to see yields rising as the yield curve steepens, as that can indicate economic expansion. The near term will be volatile, with elevated yields and investors trying to predict the impact of Trump's potential tariffs and other policies. Still, I don't think bank stocks like Wells Fargo and Jefferies are a bad play now.
