In a significant development for the US economy, job creation slowed down more than anticipated in December, while the unemployment rate saw a slight decline. This mixed data is shaping expectations for the Federal Reserve's upcoming monetary policy decisions.
Key Highlights from the December Jobs Report
The latest non-farm payrolls data, released on January 9, revealed that US employers added 50,000 jobs in December. This figure fell short of the 60,000 jobs forecast by economists surveyed by Reuters. Despite the slower pace of hiring, the unemployment rate decreased to 4.4%, edging below the consensus forecast of 4.5%.
Jonathan Cohn, head of US rates desk strategy at Nomura in New York, described the report as "decent," indicating neither a strong re-acceleration nor a material slowing of the labor market. He noted that the drop in the unemployment rate from a revised 4.5% in November was constructive, though partly influenced by the government shutdown's impact on furloughed employee reporting.
Federal Reserve's Rate Path and Market Reaction
The jobs data immediately impacted financial markets, particularly expectations for interest rate cuts. Fed funds futures traders now see only a 4.8% chance of a rate cut at the Fed's January 27-28 meeting, a sharp drop from 11.6% before the data release. The next potential cut is now considered unlikely before at least April.
Reflecting these shifting expectations, the interest rate-sensitive two-year Treasury yield rose, closing up 4.6 basis points at 3.534%. In contrast, the benchmark 10-year note yield fell slightly, leading to a flattening of the yield curve.
Comments from Federal Reserve officials echoed a cautious stance. Richmond Fed President Tom Barkin termed the December job growth "modest," highlighting that hiring remains reluctant outside specific sectors like healthcare and artificial intelligence. Atlanta Fed President Raphael Bostic emphasized that inflation remains a top economic concern, with the job market in a "low-hire, no-fire" mode.
Other Economic Developments and Geopolitical Factors
In other news, a late Thursday announcement by former President Donald Trump regarding a $200 billion mortgage bond purchase plan briefly buoyed bonds. This move led to a 22-basis-point drop in the 30-year mortgage rate to 5.99%, according to Jefferies analyst Matthew Hurwit.
On the geopolitical front, the US Supreme Court did not issue a ruling on the legality of Trump's tariff policies on Friday. The court's next decision day is January 14, with a ruling expected in the coming months. Analysts suggest that even if current tariffs are struck down, alternative implementation methods could be found, though a refund order on collected tariffs poses a significant risk.
Additionally, early January data showed a slight uptick in US consumer sentiment, though households continue to express concerns about inflation and a softening labor market. Global tensions also remain in focus following the US custody of Venezuelan leader Nicolas Maduro and ongoing discussions about US interest in acquiring Greenland.
The overall economic picture suggests a labor market that is cooling but remains resilient, giving the Federal Reserve room to maintain its current interest rate stance as it monitors inflation and broader economic indicators for the year ahead.
