Last Friday marked a significant moment in the financial world as the U.SBureau of Labor Statistics released its non-farm payroll data for December 2024, shattering market expectations and sending shockwaves across various sectorsThe report indicated that the U.Sadded a staggering 256,000 jobs in December, far exceeding the anticipated 160,000 and reaching the highest monthly growth since April of 2024. Additionally, the unemployment rate showed a favorable drop from 4.2% in November to 4.1%, falling below expectationsThe labor force participation rate remained steady at 62.5%, while wage growth maintained an impressive year-over-year increase of 3.9%, slightly dipping by 0.1 percentage points from November, yet still holding strong overall.
These figures paint a clear picture of the resilience within the American job market, which swiftly shifted the market's expectations regarding a potential rate cut by the Federal Reserve
Concurrently, news surrounding a rise in long-term inflation expectations further intensified market anxieties, creating a dual-pressure situationAs a result, traders in the federal funds futures market began recalibrating their outlook; the prevailing certainty that the Fed would cut rates before the year's end has considerably diminished.
In response to this changing landscape, major Wall Street firms adjusted their rate cut predictionsBank of America, for instance, was quick to assert that the Fed's cycle of rate cuts had come to an end, anticipating instead that interest rates would remain unchanged, and even hinting at the possibility of future hikesAccording to Aditya Bhave, a senior economist at Bank of America Global Research, “We now believe the Fed's rate-cutting cycle has concluded.” This viewpoint conveyed a robust hawkish signal to the markets.
While Citigroup still projects some rate cuts in 2025, estimating five reductions of 25 basis points, the timeline has significantly shifted from January to May
This adjustment underscores Citi's acknowledgment of the Fed's slowing pace in rate cuts.
Goldman Sachs also revised its expectations, adjusting its forecast for 2025 from three to two rate cuts, reflecting a cautious stance on further shifts in the Fed's policies.
In light of the robust non-farm employment figures, JPMorgan made a decisive move, postponing its prediction for the next Fed rate cut from March to JuneThis change highlights a comprehensive reassessment of the economic climate and Federal Reserve strategies.
Conversely, Morgan Stanley maintained a somewhat optimistic tone, admitting that while the non-farm employment report diminished the likelihood of an imminent rate cut by the Fed, it asserted that should inflation continue to subside, the possibility of a March cut remains plausible, thus leaving a glimmer of hope for the market.
Wells Fargo echoed a similar sentiment, suggesting that the Fed would refrain from cutting rates at the January meeting, further diminishing the likelihood of a cut in March, which reveals a rather pessimistic outlook regarding imminent rate reductions.
Gregory Daco, chief economist at EY, also shared his insights, observing that while the prospect of rate hikes from the Fed currently appears low, it is crucial to recognize that this possibility is no longer off the table, effectively sounding the alarm for market participants.
As the week progressed, the behavior of the U.S
interest rate futures market reinforced the shift in market sentiment regarding the Fed's rate cutting expectationsData indicated that traders now foresee only a 24.26 basis point reduction by December 2024, down significantly from the approximately 43 basis points expected prior to the jobs report releaseAs a result, market participants have become increasingly cautious and reluctant to bet on a rate cut from the current 4.25%-4.50% rangeThis shift in expectation has inadvertently bolstered the U.Sdollar, facilitating its appreciation against most major currencies, thereby solidifying its standing in the international currency market.
Amid rising inflation and increasing borrowing costs, the U.STreasury market experienced a selling spree this monthNotably, the yield on the benchmark 10-year Treasury rose significantly, reaching its highest level in over a year
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