The recent release of non-farm payroll data in the United States has sent shockwaves through the financial markets, exceeding expectations on several frontsNot only did the economy add significantly more jobs than analysts had predicted, but the unemployment rate also took an unexpected dipIn response, the dollar index surged, pushing past the 110 mark and leading traders to reassess the previously anticipated interest rate cuts by the Federal Reserve in 2025. As it stands, the market currently only anticipates a single rate cut.

Following the announcement, U.Sstock markets tumbled, with major indices dropping over 1.5% on January 10, 2024. Meanwhile, the yield on 10-year Treasury bonds skyrocketed to 4.762%. This ripple effect was felt across the globe as non-dollar currencies all experienced declines against the greenbackNotable currencies, including the British Pound, the Japanese Yen, and the Euro, weakened in a similar fashion, and the offshore Chinese Yuan ultimately closed at 7.3576 against the dollar.

The first quarter of 2024 is projected to be a period of heightened market volatility, with a strong dollar likely remaining on its upward trajectory in the near term.

The robust non-farm payroll numbers are driving the dollar's performance

In December 2024, non-farm employment surged by 256,000, defying predictionsThe unemployment rate decreased by 0.1 percentage points, resting at 4.1%. Such strong data generally signals a healthy economy.

Despite slight revisions downwards in the previous two months' data, the overall non-farm employment index remains robust in the eyes of Wall StreetOver the past three months, the average employment growth has registered at around 170,000. Breaking it down by sector, the retail trade reported a rebound with an addition of 43,000 jobs, attributed to seasonal factors related to the Thanksgiving holidayOther sectors showing impressive job gains included healthcare (+70,000), leisure and hospitality (+43,000), and government (+33,000).

Moreover, the unemployment rate's decline to 4.1% is attractive news for the marketsAverage hourly wages increased by 0.28% month-over-month in December 2024, aligning with expectations

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Specifically, production and non-supervisory employee wages grew by 0.2% month-over-month and 3.8% year-over-yearThe sectors witnessing the fastest wage growth included private education and health services (+0.5%), non-durable goods manufacturing (+0.5%), and professional and business services (+0.5%). In contrast, sectors such as mining and logging, retail trade, and transportation and warehousing showed wage contractions.

The optimistic employment outlook, however, has sidelined previous expectations for interest rate cutsAccording to the University of Michigan's consumer sentiment index, early January figures reflected a decrease against projections, with inflation expectations for both one year and five-to-ten years risingIn light of the fresh data, Goldman Sachs now anticipates the Federal Reserve will enact a 25 basis point cut in interest rates in June and December of 2025, followed by another cut in June 2026, maintaining terminal rates in the 3.5% to 3.75% range.

Some analysts take a firmer stance, suggesting that rate cuts in 2025 may prove challenging

According to the global research head at Gain Capital, if strong data persists, there is scant justification for the Federal Reserve to pursue rate cuts aggressivelyHe forecasts that only one modest cut might occur, primarily to signal a commitment rather than a reflection of economic need, benefiting continued support for the dollar.

Upon closing last week, the dollar index stood at 109.49. The market analyst indicated that current movement is testing resistance around 109.70, with the subsequent level to watch set at 110.50. Further monitoring is required near the 111.53 to 112.12 range where any potential reactions could be particularly significant.

Attention turns to the performance of U.Sequities as high valuations continue to generate buzzIn 2024, both the S&P 500 and the Nasdaq have rebounded by over 20%, with forward price-to-earnings ratios reaching 21 times—positioning them within the highest range historically.

The sustainability of these elevated stock prices raises questions, especially if the U.S

equity market faces a substantial correction that could spill over into AsiaAs one analyst pointed out, the rising yield on U.Sgovernment bonds may exert pressure on the already high valuations of U.Sstocks, particularly on growth stocksThe outlook for the S&P 500 has remained cautious due to these heightened valuations and adjustments in U.Sinterest rate policies.

Historically, scenarios where stock yields lag behind bond yields have often foreshadowed risks for equities, reminiscent of trends observed in the early 2000sDespite various signs that would signal caution, Wall Street surprisingly retains a favorable outlook on equitiesCurrent consensus forecasts suggest the S&P 500 could reach 6,600 points within the year, with some predictions looking even higher, targeting the 7,000-point mark.

Goldman Sachs' head of hedge fund research remarked that whether viewed in absolute or relative terms, U.S

stocks are perched at historical highsHowever, underpinned by the current macroeconomic environment and company fundamentals, the model suggests the S&P 500's trading price aligns closely with its fair valueIn his market experience, he noted that an excessive focus on valuation can more often hinder investors than help themMarkets deemed 'fully valued' differ from those labeled 'overvalued,' with his model positioning current U.Sstocks as at least 'fully valued.'

Regardless, the study indicates that high absolute valuations are typically accompanied by escalating risks of a market pullbackWith Goldman expecting limited scope for valuation expansion, any ascension in stock prices will hinge largely on earnings performanceTraders and economists project a year-on-year profit growth of approximately 12% for U.Sequities in 2025.

The startling non-farm employment figures prompted a dramatic retreat in U.S

stocks, with the S&P 500 plummeting 1.54% to close at 5,827 pointsTraders are left speculating whether breaking the support level at 5,880 points may trigger further technical sellingWith the next decline anticipated below the December 2024 low of 5,800 points and subsequently aiming for the support level at 5,772 points, additional selling pressure could potentially bring the index closer to the long-term trend line or the 200-day moving average, nearing the 5,670 point markHowever, prevalent market sentiment continues to lean toward buying on dips.

As we move into the first quarter, volatility is expected across Asian marketsThe turbulence in U.Sstocks, the strong performance of the dollar against emerging markets, and uncertainties surrounding potential tariffs under the American government have all contributed to predictions of fluctuations in Asia's marketplace.

Over the past week, the MSCI Asia Pacific Index (excluding Japan) showed a decline of 1.4%, largely driven by downturns in the Indian stock market, which saw drops of 3% to 4%. Conversely, the South Korean market rebounded with a 3% upswing following previous declines, while Australian and Singaporean markets led increases at around 1%. Sectors such as technology hardware, semiconductors, and healthcare outperformed, while media entertainment and utilities lagged significantly