Stocks Flower as Oil Curdles

The risk of a rate hike gets greater as employment data, in particular, get stronger, a phenomenon that is defying many economists' expectations. Wage inflation is what economists call "sticky," and it can have much more impact than energy price-driven inflation.

It seems the Fed is still concerned about inflation, despite the decline in oil and commodities prices. Fed speakers have remained hawkish throughout this oil market selloff, with Fed presidents such as Chicago's Michael Moskow and Dallas' Richard Fisher reiterating this week that inflation is still their biggest concern.

"What if the U.S. economy takes off in the second half? And the labor market never really softens? You can possibly get higher inflation," says T.J. Marta, fixed-income strategist at RBC Capital Markets.

To wit, initial jobless claims fell 26,000 to 299,000 for the week ended Jan. 6, much lower than the 320,000 analysts had expected.

"The latest news on jobless claims suggests unemployment is likely to be higher rather than lower, and you will not get a rate cut unless the unemployment rate gets higher," says John Lonski, chief economist at Moody's Investors Service.

The 10-year Treasury bond fell 12/32 to yield 4.73%, while the 30-year bond fell 21/32 to yield 4.82%. Marta believes that the 10-year could test a 4.80% yield but says that that level has usually drawn foreign central bank buyers who think that's a good place to buy.