US stocks sold off on Tuesday, while government bond yields jumped, after strong jobs and services data prompted investors to bet the Federal Reserve will lower interest rates just once this year.
Wall Street’s S&P 500 share gauge fell 1.1 per cent, while the technology-heavy Nasdaq Composite closed 1.9 per cent lower.
Electric-car maker Tesla and semiconductor giant Nvidia were among the biggest fallers, sliding more than 4 per cent and 6 per cent respectively.
In government bond markets, the 10-year US Treasury yield — a global benchmark for fixed-income assets — rose 0.08 percentage points to 4.69 per cent, its highest level since April. Higher yields point to falling prices.
Those moves followed reports that indicated the world’s biggest economy remained in good health, casting further doubt on how much the Fed is likely to cut interest rates later this year.
“The bond market is finally coming to terms that the Fed is not going to dive in, swoop in and save us all with a whole bunch of liquidity and rate cuts,” said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. “[Investors are] looking at the data and slowly absorbing the fact that the economy is actually pretty strong.”
The Institute for Supply Management’s non-manufacturing purchasing managers’ index, a gauge of activity in America’s sprawling services sector, climbed to 54.1 in December, higher than economists’ expectations of 53.3. A reading above 50 signals expansion.
Separate data from the US Bureau of Labor Statistics showed there were 8.1mn job vacancies in November, above forecasts of 7.7mn openings, indicating unexpectedly strong demand for US workers.
Investors have been watching measures of business activity and the health of the labour market closely for clues as to how far and how rapidly the Fed will cut interest rates.
Following Tuesday’s data, investors were betting the central bank will deliver a quarter-point rate cut by July, with a roughly 35 per cent chance of another such move by the end of the year. Earlier in the day, the odds of a second quarter-point reduction had been nearly 70 per cent.
The Fed first reduced rates from their 23-year highs in September, and made two further cuts before the end of 2024. However, in December policymakers signalled a slower pace of easing in 2025, underscoring persistent concerns about inflation and unnerving investors.
In a week shortened by a stock market closure on Thursday and a half-day for bonds, investors are also bracing themselves for December payrolls data.
Economists polled by Reuters are expecting Friday’s figures to show that US employers added 160,000 new positions last month, down sharply from 227,000 in November.
Franklin Templeton’s Desai said “people are positioning for Friday’s non-farm payrolls and are worried that we get a blowout”.
“If we do get a blowout number on Friday,” she added, “I think you’d see this march going even further [in Treasury yields].”