Bond Vigilantes Return. Why the Jobs Report Could Mean Pain for Stock Markets and 5 Other Things to Know Today. — Barrons.com

Bond vigilantes are back and they could be preparing an uncomfortable welcome for President-elect Donald Trump on his return to the White House.

These fiscal enforcers sell government debt when they are worried about rising inflation, forcing yields up. With the 10-year Treasury yield topping 4.7% — its highest level since last April — there is evidence they are on the prowl.

There's good reason for bond vigilantes' scrutiny. The latest Federal Reserve minutes released Wednesday suggested officials are fretting that inflation this year will be higher than previously expected. Meanwhile, Trump's proposed tariff policies — which economists largely agree would be inflationary — could be implemented more quickly than expected. A CNN report said the president-elect is considering declaring a national economic emergency to provide legal justification for the levies.

Bonds are in focus on Thursday with the stock market closed on a day of mourning for late President Jimmy Carter. If Treasury yields move further toward 5%, that could be a tipping point for stocks as it erodes the value of future earnings and therefore valuations.

That sets up Friday's jobs report for December. Any signs of a hotter-than-expected labor market could intensify worries about inflation. Rather than the frequently-revised headline jobs addition figure, investors should pay attention to data on average hourly earnings — which have been creeping up in recent months.

Good news for workers could ring alarm bells for the bond vigilantes, and that could mean pain for the stock market as a whole.

• Adam Clark

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Fed Officials Uncertain About Inflation, Potential Policy Fallout

Federal Reserve policymakers differed on where interest rates could settle in 2025 and signaled a slow and gradual pace of rate cuts ahead, because of lingering inflation, solid economic growth, and fiscal policy uncertainty, according to their December meeting minutes released Wednesday.

• Although officials were upbeat about the U.S. economy, noting stronger-than-expected economic activity and consumer spending, they mentioned higher recent inflation readings, potential changes in trade and immigration policy, and the risk that the disinflation process toward their 2% target may have or could stall.
• Their median estimate for the federal-funds rate target range at the end of 2025 implied a range of 3.75% to 4%, or half a percentage point below its current level. The median forecast in their September dot plot implied a full percentage point of cuts in 2025.
• Fed Chair Jerome Powell said last month that now that their policy stance is significantly less restrictive, down a full percentage point from its peak, officials can be more cautious about further adjustments, tying future moves to observed progress on slowing inflation.
• The agenda for Republicans who will control Congress for at least the next two years includes curbing immigration, lowering taxes and regulations, and enacting tariffs on trading partners. Fed officials expressed greater uncertainty about the scope, timing, and economic effects of those potential changes.

What's Next: When policymakers meet next on Jan. 28-29, they will have the December jobs report coming Friday and inflation data from Jan. 15. Interest-rate futures markets are pricing in a less-than-5% chance of a rate decrease then, and the greatest odds of just one quarter-point cut in 2025.

• Nicholas Jasinski and Janet H. Cho

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Jefferies' Profit Surge Signals Long-Awaited Rebound In M&A Activity

Jefferies Financial Group reported a robust surge in fourth-quarter 2024 profit and revenue, including a record $596.7 million in revenue from advising clients. The results marked a turnaround from a notably soft year-ago quarter and signaled that Wall Street's dealmaking environment has improved.

• The New York-based financial services firm reports ahead of other Wall Street firms and is often viewed as a harbinger of what's to come. CEO Richard Handler said they are starting 2025 in the best position ever. Jefferies' fourth-quarter profit rose 212% from a year earlier, and revenue jumped 63%.
• Strong performances in the investment banking business drove the stronger results, Jefferies said. Overall investment banking revenue totaled $3.4 billion in 2024, the bank's second-highest annual figure. Revenue of $2.8 billion from capital markets in 2024 was up 24% from a year earlier.
• Investors are watching how well banks fare in notching investment banking assignments as the industry's dealmaking engines rev up. Following a period of ultralow borrowing costs and a banner run for investment bankers, recent higher interest rates had put a damper on initial public offerings, mergers, and acquisitions.
• Activists are helping drum up business for banks. Trian Fund Management says 3M spinoff Solventum isn't reaching its potential and demanded the firm outline a long-range plan and consider divestitures. Solventum said it has delivered two consecutive quarters of above-expected results and twice raised its full-year outlook.

What's Next: A Solventum spokesperson told Barron's it is making structural changes and strategic investments for profitable growth and to unlock significant value. Trian holds about 5% of the shares and says reducing its business complexity could accelerate share buybacks and M&A opportunities.

• Rebecca Ungarino and Janet H. Cho

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Oil Producers Preview Disappointing Numbers as Electricity Demand Remains High

Oil producers could expect a boost from President-elect Donald Trump's enthusiasm for drilling, but disappointing fourth-quarter earnings previews suggest business is slowing as Trump starts his second term. At the same time, electricity generation is attracting attention from an energy-hungry tech sector looking to power artificial intelligence projects.

• Exxon Mobil and Shell both released disappointing previews. Exxon's earnings numbers detailed weakness in its refined products and chemicals divisions, and pointed to pain from a dip in oil prices. Shell's production of liquefied natural gas and oil is falling and is below expectations.
• Citi analyst Alastair Syme said Shell's statements suggest disappointing news about its offshore exploration in Namibia. And its preliminary numbers indicate softness in oil and gas trading and depressed margins in chemicals.
• At the same time there is a potential deal brewing in the electricity-generation sector. Constellation Energy is nearing a deal for closely held Calpine in a cash and stock transaction that would value the power company at $30 billion, The Wall Street Journal reported.
• Constellation owns 21 nuclear reactors, natural gas, and renewable generation, all of which are in very high demand from big tech companies looking to power new AI data centers, electric vehicles, and new manufacturing. Buying Calpine would significantly beef up Constellation's natural gas plants portfolio.

What's Next: Although Calpine is heavily weighted to natural gas, it has also developed some geothermal energy resources that could potentially qualify for tax credits under the Biden administration's Inflation Reduction Act. A deal could be announced as soon as Monday, the Journal reported.

• Avi Salzman and Janet H. Cho

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Wildfires and Extreme Weather Concern Home Buyers as Risks Rise

Lifestyle and lower living costs influence many peoples' decision to move to areas endangered by extreme weather events. But soaring insurance costs, two recent devastating hurricanes, and current deadly wildfires in California could change minds, and climate risk scoring and insurance could alter the economics of where people choose to live.

• Zillow Group is adding property climate-risk estimates from risk modeling firm First Street that analyze the likelihood of damage from flood, fire, and wind for the next 30 years. It joins home listing websites Redfin, Realtor.com, and CoStar Group's Homes.com. (Barron's parent News Corp also owns Realtor.com operator Move.)
• Better climate scores could attract more buyer interest while homes with worse readings could see lower prices, according to a National Bureau of Economic Research working paper co-written by Redfin's chief economist, Daryl Fairweather, and researchers from the University of Southern California, Columbia University, and MIT.
• The tool isn't the only way that prospective home buyers can learn about a property's weather risks. The Federal Emergency Management Agency also maps potential hazards through its National Risk Index and maintains maps that designate which homes require flood insurance.
• Insurers paused coverage or raised prices in California after wildfires in 2017 and 2018. Last spring, State Farm canceled 72,000 policies there, about 40% covering homes including in upscale neighborhoods such as Pacific Palisades in Los Angeles. Allstate stopped issuing new policies for business and personal property in California in 2023.

What's Next: JPMorgan analysts have calculated a preliminary insured loss estimate of $10 billion for the devastating Pacific Palisades fire. The LA fires have killed at least five people and burned more than 2,000 structures. Among publicly traded insurers, Allstate, Travelers, and Chubb are most exposed to California, the analysts said.

• Shaina Mishkin, Evie Liu, and Liz Moyer

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Nvidia Faces Tightening of China Chip Export Curbs Nvidia could soon find it even tougher to sell products to China, with the Biden administration reportedly planning to impose a final round of restrictions on artificial intelligence chip exports before leaving office later this month.

• Officials want to create three tiers of curbs that would give U.S. allies free rein to import chips but block sales to unfriendly countries, according to Bloomberg, which cited people familiar with the matter. The new laws could be issued as soon as Friday, per the outlet.
• In December, The Wall Street Journal reported that the White House was planning to restrict sales of advanced AI chips in certain parts of the world to prevent them falling into Chinese hands. The top Democrat and Republican on the House China Select Committee said in a letter to Commerce Secretary Gina Raimondo last week that AI could help Washington "to pry both companies and countries out of Beijing's orbit."
• Nvidia shares fell in late trading on Wednesday. The stock, which racked up double-digit gains in both 2023 and 2024 thanks to an AI-powered profit surge, slid 1.1% after the closing bell. Nvidia and the Commerce Department's Bureau of Industry and Security, which has implemented previous measures designed to limit chip sales to China, didn't immediately respond to a request for comment from Barron's.

What's Next: Separately, the Dutch government said Thursday that it had struck a deal with Nvidia to use the chip maker's products in the building of a potential AI "supercomputer" as part of the European Union's bid to strengthen technological innovation across the Atlantic. Last year, the EU approved plans to build the trading bloc's first seven supercomputers by 2026.

• George Glover

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January is a big month for the letter R, with resolutions, resets and tax returns demanding our attention.

While it's undeniably early days, the Internal Revenue Service will tell you it's not too early to think about the income-tax returns for 2024 that will start to come due soon enough.

The federal tax collector typically begins accepting and processing tax returns for the prior calendar year in late January, though it hasn't yet announced when it will start handling returns for 2024.

In the interim, there are documents to watch for and other preliminary planning that taxpayers can do. MarketWatch took a look.

For more on this, read here.

• Andrew Keshner

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• Newsletter edited by Liz Moyer, Patrick O'Donnell, Rupert Steiner

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