Stocks rose alongside bond yields last year, because the Fed cut rates into a strong economy. The 10-year US Treasury yield increased 70 basis points in 2024, ending the year at 4.58%. The 30-year US Treasury yield climbed 75 basis points to 4.78% and has since edged up further to 4.82%. Bond yields continue to climb, and the yield curve is steepening, as the term premium normalises. Real yields are now testing the highs of October 2023.
There is still no sign of a deterioration in the labour market. Seasonally adjusted initial claims fell 9k to 211k in the week ending December 28th, a 35-week low. The drop in the insured unemployment rate to a 13-week low suggests the U3 rate may have fallen in December too. According to the Treasury general account, withheld individual/FICA taxes continue to rise strongly, tallying with the robust initial claims data.
The latest Dallas Fed Banking Conditions Survey for December was noteworthy, pointing to a jump in both present and future loan demand. The NACM Credit Managers’ Index for the services sector has also shown a marked improvement. Regional Fed surveys are, on the whole, pointing to stronger economic activity ahead.
Many of the underlying factors that underpinned strong growth in the US in 2024 remain in place. Household debt as a share of GDP has continued to trend lower. As a result, household debt service ratios have remained low and stable despite the rise in interest rates. Alongside solid wage gains, record household net worth has also supported consumer spending at the margin, as annual house price gains re-accelerate.
