Strong Non-Farm Payrolls Dampen Rate Cut Expectations, AI Disruption Concerns Continue to Simmer
- Core View: The robust US January non-farm payrolls data has significantly weakened market expectations for an early Fed rate cut, leading to a rotation of funds from high-valuation tech stocks to traditional economic sectors and hard assets. Concurrently, concerns about AI disruption have triggered selling in software and real estate services stocks.
- Key Elements:
- US January non-farm payrolls added 130,000 jobs, far exceeding expectations, with the unemployment rate dropping to 4.3%, indicating strong labor market performance.
- Market expectations for rate cuts have been delayed; the swap market has pushed back the timing of the first rate cut from June to July, with the probability of a March cut being extremely low.
- The US stock market structure is diverging, with traditional sectors like energy and materials outperforming, while large-cap tech stocks and software ETFs show weakness.
- Concerns about AI disruption are spreading, leading to significant selling pressure on software stocks and real estate services stocks (e.g., CBRE Group).
- Hard assets such as the semiconductor sector (Philadelphia Semiconductor Index up 2.3%) and spot gold (up 1.3%) have attracted fund inflows.
Original Authors: Bao Yilong, Zhang Yaqi, Li Jia
Original Source: Wall Street Insights
The stronger-than-expected US January jobs report swiftly dashed market hopes for an early Federal Reserve rate cut, with traders pushing back expectations for the first cut from June to July, putting pressure on US Treasury prices. US stock indices initially gapped higher after the data release but later gave up gains as tech stocks weakened.
On Wednesday, the S&P 500 was essentially flat, while the Dow and Nasdaq closed slightly lower. Notably, the equal-weighted S&P index rose 0.2%, with nearly 300 advancing stocks. Sectors like Energy, Materials, and Consumer Staples—representing the "old economy"—performed relatively better. Capital continues to shift from high-valuation growth stocks towards the "real economy" and hard assets.
According to Wall Street Insights, US non-farm payrolls added 130,000 jobs in January, far exceeding market expectations of 65,000, and the unemployment rate unexpectedly fell to 4.3%. Although employment data for the previous year was significantly revised downward, January's rebound was sufficient to break the narrative that "the labor market is rapidly weakening."
Following the data release, rate cut expectations plummeted. The swaps market pushed the timing of the next rate cut from June back to July, almost completely ruling out a March cut. CME data shows the probability of the Fed holding steady in March has risen above 94%.
Weakness in large-cap tech stocks dragged down the overall performance of US equities. Traditional economy sectors—Energy, Consumer Staples, and Materials—all outperformed other sectors.
Kevin O'Neil from Brandywine Global stated:
While job growth remains concentrated in the healthcare sector, manufacturing has returned to positive growth, showing encouraging signs of improvement.
Mike Reid from RBC Capital Markets said:
The January jobs report shows continued improvement in the US labor market. Looking ahead, this report solidifies our previous view that the Fed will maintain a prolonged pause on rate hikes in 2026.
AI disruption concerns continue to simmer, spreading from software to private credit, insurance brokerage, brokerages, and now to real estate services and financial intermediaries. The software ETF fell 2.6%.
(SaaS stocks decline; analysis suggests the software stock rebound has ended)
Real estate services stocks were sold off, with CBRE Group and Jones Lang LaSalle plunging 12%.
(Real estate services stocks tumble)
The Philadelphia Semiconductor Index rose 2.3%, continuing to attract capital inflows. Micron surged 10% on expectations of HBM4 capacity release, as the market renewed bets on the certainty of the AI infrastructure chain. Robinhood fell nearly 9% due to disappointing earnings, reflecting cooling retail trading enthusiasm.
(Semiconductor sector rises)
Bond market volatility was also pronounced. Long-end US Treasury yields had retreated before the jobs report but quickly rebounded after the data. The policy-sensitive 2-year Treasury yield rose 6.4 basis points, while the 10-year yield gained about 3 basis points.
(Intraday movement of US benchmark stock indices)
Amid strong jobs data and hawkish Fed expectations, the US Dollar Index experienced significant intraday volatility, closing up a mere 0.08%. The Japanese Yen rose for a third consecutive day, appreciating over 1% intraday. Cryptocurrencies weakened under pressure from "higher for longer" interest rate expectations.
Spot gold fluctuated higher by 1.3%, holding above $5,080. Silver surged then retreated but still gained over 4%.
Wall Street Insights mentioned that reports of Trump privately considering withdrawing from the USMCA initially pushed crude oil up over 2% intraday. However, gains narrowed to 1% due to a significant increase in crude inventories and a rebound in US production.
On Wednesday, the three major US stock indices surged then retreated, with the S&P essentially flat and the Dow and Nasdaq closing slightly lower. AI disruption concerns continue to simmer, with the software ETF falling 2.6%. Real estate services stocks were also sold off due to AI fears, with CBRE Group and Jones Lang LaSalle plunging 12%.
