Strong non-farm payrolls hit interest rate cut expectations, AI disruption concerns are still fermenting

Author: Bao Yilong, Zhang Yaqi, Li Jia

Source: Wallstreetcn

The unexpectedly strong U.S. January employment report quickly extinguished market hopes for an early Fed rate cut, causing traders to delay the first rate cut expectation from June to July, and U.S. Treasury prices came under pressure. U.S. stocks initially opened sharply higher after the data release but then gave back gains due to weakness in tech stocks.

On Wednesday, the S&P 500 was roughly flat, while the Dow and Nasdaq closed slightly lower. Notably, the equal-weighted S&P 500 rose 0.2%, with nearly 300 stocks advancing. Old economy sectors such as energy, materials, and consumer staples outperformed others. Funds are still shifting from high-valuation growth stocks to the “real economy” and hard assets.

According to Wallstreetcn, U.S. non-farm payrolls increased by 130,000 in January, well above the market expectation of 65,000, and the unemployment rate unexpectedly fell to 4.3%. Although last year’s employment data was significantly revised downward, the January rebound is enough to break the narrative that the labor market is rapidly weakening.

After the data was released, expectations for rate cuts declined sharply. The swap market pushed back the next rate cut from June to July, with nearly eliminating the probability of a March cut. CME data shows the probability of the Fed holding steady in March has risen to over 94%.

Weakness in large tech stocks dragged down the overall performance of U.S. stocks. Traditional sectors such as energy, consumer staples, and materials outperformed others.

Kevin O’Neil of Brandywine Global said:

Although employment growth remains concentrated in healthcare, manufacturing has returned to positive growth, showing encouraging signs of improvement.

Mike Reid of Royal Bank of Canada Capital Markets stated:

The January employment report indicates ongoing improvement in the U.S. labor market. Looking ahead, this report reinforces our previous view that the Fed will hold rates long-term until 2026.

Concerns about AI disruption are still fermenting, initially in software, then private credit, insurance brokers, and securities firms, now spreading to real estate services and financial intermediaries. Software ETF fell 2.6%.

(SaaS stocks declined, analysts believe the software rebound has ended)

Real estate service stocks were sold off, with CBRE Group and Jones Lang LaSalle plunging 12%.

(Real estate service stocks plummeted)

The Philadelphia Semiconductor Index rose 2.3%, continuing to attract funds. Micron surged 10% on expectations of HBM4 capacity release, with the market betting again on the certainty of AI infrastructure supply chains. Robinhood dropped nearly 9% due to weaker-than-expected earnings, reflecting cooling retail trading enthusiasm.

(Semiconductor sector rose)

Bond market volatility was also evident. Before the non-farm payrolls release, long-term U.S. Treasury yields fell but quickly rebounded after the data. The policy-sensitive 2-year Treasury yield rose 6.4 basis points, while the 10-year yield increased about 3 basis points.

(Intraday movement of major U.S. stock indices)

Amid strong employment data and hawkish Fed expectations, the dollar index experienced significant intraday swings, ending the day up 0.08%. The yen appreciated for the third consecutive day, strengthening over 1% at one point. Under the pressure of “higher for longer” rate expectations, cryptocurrencies remained weak.

Spot gold oscillated higher by 1.3%, staying above $5,080. Silver surged then retreated but still gained over 4%.

Wallstreetcn mentioned that reports indicated Trump privately considered withdrawing from the USMCA, and crude oil briefly rose over 2% intraday. However, a significant increase in crude inventories and a rebound in U.S. production caused the oil price gains to narrow to 1%.

On Wednesday, the three major U.S. stock indices surged then pulled back; the S&P 500 was basically flat, while the Dow and Nasdaq closed slightly lower. Concerns about AI disruption are still fermenting, with the software stock ETF down 2.6%, and real estate service stocks also sold off due to AI worries, with CBRE Group and Jones Lang LaSalle plunging 12%.