Markets Expect Only One 2025 Rate Cut Following Strong Labor Data

Yields soar on strong labor market data. The short end of the yield curve rose 10 bps in the immediate aftermath of this morning’s labor data, which showed robust hiring and a 0.1% decline in the unemployment rate. Yields closed 2-13 bps higher across a flattening curve, with 2-year and 10-year yields now at 4.38% and 4.76%, respectively. The 2-year yield is at its highest level since July, up ~85 bps from recent lows reached in September. Markets overwhelmingly expect only one 25 bp rate cut for the year, and a full rate cut is not priced into Fed Funds futures until September.

December marks another strong month for labor markets. Hiring in December shot past estimates to notch the highest monthly level since last March and a second consecutive month of accelerated growth. Payrolls increased by 256,000 vs. estimates of 165,000 while last month’s results were revised slightly lower from 227,000 to 212,000. Contrary to expectations of no-change, the unemployment rate fell from 4.2% to 4.1%, remaining near pre-Covid levels, while average hourly earnings grew in-line with forecasts at 0.3%. Additionally, today’s release noted that last year’s peak monthly unemployment rate (July) was revised from 4.3% to 4.2%.  Altogether, today’s data painted a picture of roaring labor markets, supporting a patient Fed.

Inflation expectations hit a multi-year high ahead of CPI. University of Michigan 1-year and long-term inflation expectations were well above their forecasts at 3.3% each, the latter being at its highest level since 2008. Joanne Hsu, director of the survey, said that tariffs contributed to the high inflation expectations as “nearly one-third of consumers spontaneously mentioned tariffs, up from 24% in December and less than 2% prior to the election.” The data comes ahead of next week’s consumer inflation print, where core CPI is expected to decelerate to 0.2% price growth MoM and remain flat at 3.3% price growth YoY.