It’s been a busy start to the year for investors, as shifting geopolitical risks and rising economic uncertainty led to choppy returns for stocks. Concerns about AI spending and profitability hit technology stocks especially hard. However, other sectors like financials and consumer discretionary have also seen losses to start the year.
One area that has held up relatively well however is the bond market, which has been supported by falling interest rates and rising prices throughout the first six weeks of the year. This falling interest rate environment was in turn driven in large part by the recently released January job and inflation reports, which signal shifting risks for the economy and likely further support from the Federal Reserve (the Fed).
To understand why the January releases were so important, let’s take a closer look at the data.
Labor Market Weaker than Expected in 2025
While the headline news from the January job report was that the economy added 130,000 jobs to start the year, the details of the report painted a less rosy picture.
The January employment report included revisions to earlier job estimates, which showed significantly lower than expected levels of hiring throughout 2025. Roughly one million jobs were removed by these revisions, bringing the seasonally adjusted monthly hiring rate down from 49,000 jobs a month to just 15,000.
The slowdown in hiring in 2025 led to a series of interest rate cuts in the fourth quarter, and that was before the estimates were revised down. If we see signs of further labor market weakness in 2026, it would likely lead to additional calls for rate cuts later in the year, but the Fed is focused on more than just the health of the job market.
Inflation Cooling
Aside from the labor market, the Fed also keeps a close eye on inflation reports in order to achieve their dual mandate of supporting maximum employment and stable prices.
The January Consumer Price Index (CPI) report largely showed signs of cooling inflationary pressure, as headline consumer price growth dropped from 2.7 percent in December to 2.4 percent in January on a year-on-year basis. This marked the lowest annual inflation rate since May, and core inflation was even better. In January, core consumer inflation—which strips out the impact of food and energy prices—fell to its lowest level since 2021.
While still above the Fed’s 2 percent inflation target, the recent cooling inflation has been welcomed by both the Fed and investors.
Federal Reserve Support
With signs of slowing inflation and a weaker-than-previously thought labor market, expectations for interest rate cuts have increased.
At the start of the month, markets were pricing just under 2 interest rate cuts by the end of the year. Since then, calls for rate cuts have risen, with markets now pricing in roughly 50 percent chance of three cuts by year end.
Two-year Treasury yields are down roughly 15 basis points since the start of February, and we’ve seen even larger declines for the long end of the yield curve. Going forward, heightened expectations for future rate cuts should keep yields down and bond prices up.
Implications for Investors
So, what does this all mean for investors?
Well, for bondholders, the economic backdrop has largely been supportive so far this year, and is expected to continue as we head into spring. The improving inflation picture is especially good news for fixed income investors, as rising inflation was one of the potential risks that bonds faced heading into the year.
The weaker-than-expected 2025 jobs numbers were important in helping economists and investors understand where we were economically at the end of last year. With that being said, the data was largely backward-looking, and the more recent rebound in hiring in January helped limit the immediate market reaction to the negative revisions.
Going forward, it’s quite possible that the improved hiring in January is here to stay, which would be a good sign for the overall health of the economy.
If, however, we see renewed signs of labor market weakness in February and beyond, this would likely lead to enhanced expectations for further rate cuts, which in turn would be expected to support asset valuations.
If there’s one thing we know for sure, it’s that there’s certainly uncertainty when it comes to forecasting the path for the economy and markets throughout the rest of the year. Even amid this uncertainty, it’s believed continued economic growth and market appreciation remain the most likely path forward.
This material is intended for informational/educational purposes only. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. This communication should not be construed as investment advice, nor as a solicitation or recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
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