Rate Cut Hopes Squashed by December Payroll Data

The U.S. added 256,000 jobs in December, according to Bureau of Labor Statistics nonfarm payrolls data, significantly more than expectations of 155,000 for the month. The unemployment rate was revised down to 4.1% from 4.2% the prior month.

The data all but eliminate the chance of a cut to the fed funds rate in the first half of the year. The CME Group’s FedWatch tool estimates a 97.3% chance the Federal Open Market Committee will keep rates unchanged at its January 29 meeting. Stocks fell following the report, and Treasury yields ticked up.

In the minutes of the FOMC’s December 17 and 18 meeting, Federal Reserve officials made multiple references to a weakening labor market, but the official December 2024 numbers show the labor market is not weakening.

“Participants pointed to various risks to economic activity and employment, including downside risks associated with weaker output growth abroad, increased financial vulnerabilities stemming from overvaluation of risky assets, or an unexpected weakening of the labor market, and upside risks associated with increased optimism and continued strength in domestic spending as upside factors,” according to the FOMC minutes.

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Next week’s Consumer Price Index data point will be important, as the CPI has steadily increased from 2.4% in September 2024 to 2.7% in November 2024. With rising job growth and rate cuts off the table, worries of increasing inflation could cause the Fed to consider policy rate hikes, some investors posted Thursday in reacting to the BLS data.

Investors React

Investment professionals reacted with a variety of opinions and thoughts on what to expect in the next several months.

Peter Graf, CIO of Nikko Asset Management warns that the firm cannot rule out a rate hike as the Fed’s next move. “Today’s unemployment report likely sounds the death knell for this easing cycle from the Fed,” Graf said. “The beat on the fickle payrolls number could later be revised away, but its strength is legitimized by household unemployment survey results that have at least plateaued, if not peaked. The maturity wall for corporate borrowing will start to seem much closer now that the balance of risks has tilted toward inflation, and we can’t rule out a hike as the Fed’s next move.”

“Data did not earn a January cut. The U.S. labor market ended 2024 on a firm footing with strong employment growth, falling unemployment and resilient wage pressures,” said Lindsay Rosner, head of multi sector fixed-income investing at Goldman Sachs Asset Management, in a statement. “The strength of today’s December jobs report puts to rest lingering chances of a 25 [basis-point] cut in January and shifts the focus to the March meeting, where further rate cuts will depend on progress on inflation.”

Jack McIntyre, a portfolio manager at Brandywine Global, said in a statement: “The outsized strength in the November employment report put a stake in the heart of more Fed rate cuts in the first half of 2025” and added that the Fed made a policy mistake by cutting rates by a total of 100 basis points last year. “The longer the Fed is on pause, the more likely the next move will be to start increasing policy rates. As important as the labor situation is, THE critical variable for the Fed and markets is all things inflation. Next week’s inflation data will be more important. Look for [the] Treasury market to shift to a bear-flattening from its recent bear-steepening trajectory. Higher oil prices won’t help the Treasury complex.”

Gina Bolvin, president of the Bolvin Wealth Management Group, advised in a statement reacting to the employment data, that “investors may want to brace themselves for more volatility as the market recalibrates expectations for fewer cuts. I’d be a buyer on a dip; we expect another good year of solid earnings growth. At some point, the market will embrace good news, but maybe not today.”

Jeffrey Roach, chief economist for LPL Financial, offered some perspective on the data in a statement: “Despite the blow-out report this morning, the 2024 average monthly gain in private payrolls of 149,000 was cooler than the 2023 average of 192,000. Investors should expect another step downward in 2025. In the meantime, the Fed will keep rates unchanged unless we see significant cooling in the job market.”

Chris Zaccarelli, the CIO of Northlight Asset Management, said in a statement: “Although the stock market doesn’t need lower rates in order to go higher, lower rates are a tailwind for equities and, more importantly, a Federal Reserve bank that is easing policy is always a better environment for equity investors than one where they are tightening policy (or leaving policy unchanged. At this point in the cycle, earnings will need to improve—and not just within the large tech companies—in order to have markets ‘grow into’ their already high valuations, so we would be cautious in the short term.”