Markets

The ASX 200 tumbled 1.2% on Monday – Are markets in trouble?

Mon 13 Jan 25, 4:46pm (AEDT)
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Source: Shutterstock

Key Points

  • Strong US employment data was a key driver behind the ASX 200's 1.2% tumble on Monday, with Technology (-3.3%), Financials (-2.0%), and Consumer Discretionary (-1.9%) sectors leading the decline
  • The US 10-year Treasury yield has risen 56 basis points in the past month to 4.76%, reaching levels that previously triggered major market selloffs and pullbacks
  • Market expectations for Fed rate cuts have shifted dramatically, with the probability of a March rate cut falling to 22.1% from 66.4% a month ago

The S&P/ASX 200 tumbled 1.2% on Monday, after stronger-than-expected US employment data lowered market expectations for more interest rate cuts from the Federal Reserve this year.

The robust employment figures pushed bond yields, which were already at elevated levels, even higher. The US 10-year Treasury yield climbed 7 basis points to reach 4.76% – a level not seen since November 2023.

This surge in yields took a significant toll on local equities, particularly rate-sensitive and growth-oriented sectors. The selloff hit Technology stocks the hardest (-3.3%), followed by Financials (-2.0%) and Discretionary (-1.9%).

Inflation Makes a Comeback

Three weeks ago, Federal Reserve Chair Jerome Powell cautioned markets that future rate cuts would depend on continued progress in bringing inflation back to the central bank's 2-3% target. "We moved pretty quickly to get to here, and I think going forward obviously we're moving slower," he stated. These comments triggered a sharp decline for the ASX 200, which fell almost 3% between December 19-20.

Now, these inflation risks are beginning to materialise. Markets are particularly sensitive to any potential surge in bond yields or delays in expected rate cuts.

The market is still awaiting the latest batch of US inflation data – which will be released on Wednesday,15 January at 11:30 pm AEDT. While the official data is a few days away, plenty of indicators point towards a reacceleration in consumer prices.

US ISM services index advanced 2 points, to 54.1 in December. A sub-index that measures prices paid for materials and services jumped more than 6 points, to 64.4 - or the highest in 22 months. Fifteen of the 18 services industries flagged an increase in prices paid in December. The prices paid index is often viewed as a leading indicator for CPI.

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Source: ISM

US preliminary consumer sentiment for January was 73.2, largely in-line with consensus and down from 74.0 in December. Within the report, year-ahead inflation expectations soared from 2.8% last month to 3.3%, and now sitting at the highest since May 2024. Long-run inflation expectations aggressively ticked higher, with 5-10-year inflation expectations now sitting at the highest since 2008

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Source: University of Michigan

Oil prices are on the rise. Brent crude has rallied 12.5% since December, trading above US$81 a barrel for the first time since last October.

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Brent crude price chart (Source: TradingView)

Trump says he is not looking to dial back his tariff plans, according to the Washington Post. Trump has proposed a 60% tariff on goods from China as well as deporting millions of migrants and lowering corporate tax cuts. All three of these policies could fuel inflation.

The above data, alongside Powell's comments, has pushed the US 10-year Treasury yield up around 56 basis points in the past month to 4.76%. Previous surges above 4.6% coincided with major selloffs (October 2023) and pullbacks (April 2024).

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US 10-year Treasury yield (Source: TradingView)

Economists now see a strong likelihood that the Fed will hold interest rates higher for longer and see little reason for further cuts as inflation risks skew to the upside.

CME's Fedwatch tool currently shows a 97.3% chance of a hold at the Fed's January meeting (down from 77.2% a month ago). The probability of a hold in March has also soared to 77.9%, up from 33.6% a month ago, and the first rate cut of the year has shifted to October.

What Happens Now?

Stocks are in an increasingly fragile place, given the magnitude of the move in bond yields. If yields can't peak and ease from current levels, expecting markets to make another leg higher would be a stretch.

This scenario, however, isn't unprecedented. Early 2024 began with market expectations of seven Federal Reserve rate cuts by year-end. By March, these projections had moderated to just three cuts, while the US 10-year Treasury yield surged as much as 90 bps between 27 December 2023 and 25 April 2024.

Despite this challenging yield environment, the ASX 200 managed to advance, albeit with considerable volatility.

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US 10-year Treasury yield (top) and ASX 200 (bottom) | Source: TradingView

Peaking bond yields will be key in helping markets stabilise, with much of this depending on upcoming economic indicators, particularly US inflation data. However, if inflation shows signs of reacceleration, especially through consecutive hotter-than-expected readings – Then the market might find itself in a pickle.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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