This week is expected to be relatively quiet.  The most notable data release will be the ISM Manufacturing Report on Friday, January 3. Early in the week, we’ll get some housing data, while continuing jobless claims on January 2 will likely draw attention. Last week’s claims spiked to 1.91 million, though these figures are often revised downward. If claims unexpectedly increase, it could signal a potential slowdown in the labor market, but the broader data suggests continued strength.

The December jobs report from the BLS won’t arrive until January 10, making this week’s ISM data—expected at 48.2, slightly down from 48.4—one of the few key indicators for now.
 

Equities and Market Performance

Last Friday, equity markets opened sharply lower but managed a modest rebound by the close. The S&P 500 saw a notable late-day rally, gaining about 30-40 basis points in the final 15 minutes, driven by a $2 billion buy imbalance. Despite this, market breadth was weak: only 48 stocks advanced, while 452 declined, and three were unchanged.

(Click on image to enlarge)

Major contributors to losses included tech giants like Nvidia, Tesla, Microsoft, Apple, and Amazon. The Bloomberg 500 index mirrored this weakness, emphasizing the challenging day for equities.
 

S&P 500 Futures and Financing Trends

One noteworthy trend has been the sharp decline in BTIC S&P 500 total return futures contracts for March 2025. These contracts, used to measure equity financing costs, have fallen from a high of 179.5 to just 71 as of Friday’s close. Historically, such contracts trade within tighter ranges, suggesting that this year’s movement is more extreme.

(Click on image to enlarge)

This could indicate end-of-year deleveraging or reduced demand for margin and leverage. If this trend persists, it may reflect broader market dynamics, such as tightening liquidity or adjustments in dealer balance sheets. We’ll have more clarity when FINRA margin balance data is released in mid-January.

(Click on image to enlarge)

Interest Rates and the Yield Curve

The 30-year Treasury yield hit its highest level since November 2023, closing at 4.82%. Unlike late 2023, when yields were falling, they are now rising, potentially heading back above 5%. A steepening yield curve, especially in the 30-year minus 3-month and 10-year minus 3-month spreads, is unfolding rapidly.

(Click on image to enlarge)

This bear steepener—where longer-term yields rise faster than short-term ones—can weigh on equities. Historically, equities struggle during periods of steepening, especially when rates at the back end of the curve lead the way higher.

(Click on image to enlarge)

Key Market Signals and Historical Parallels

Forward-looking contracts, such as the 3-month Treasury bill vs. 18-month forward contracts, suggest rates could rise by about 20 basis points over the next 18 months. Similarly, 12-month forward contracts imply a 50% chance of a rate hike within the next year. This may explain reduced demand for leverage, as equity financing costs are unlikely to decrease.

(Click on image to enlarge)

Drawing parallels to the 1960s, rising rates and a deepening yield curve contributed to negative equity risk premiums and significant market challenges during that era. We could see similar dynamics unfold in the coming months if these trends persist.

(Click on image to enlarge)

More By This Author: