With This Kind of Data, The Fed Isn’t Cutting Rates This Year

January 10, 2025 at 10:22 AM EST

FED The Federal Reserve System, the central banking system of the United States of America.

The non-farm payroll data was hotter than expected and compounded by other labor market indicators that say the FOMC won’t cut interest rates this year. The headline figure was more than double the expected; unemployment fell to 4.1%, and wages rose roughly 4%. Job and wage growth signal that one Fed mandate is covered, and the other still needs attention.

The only bad news is that manufacturing employment contracted, but it is a small fragment of the economy, offset by government job gains and broad-based strength in services. The takeaway is that labor markets were solid at the end of 2024, and we’re heading into a seasonally strong hiring period. Employers will ramp up employment over the next few months to cover their Easter, Spring Break, and summer needs.

The U.S. Labor Market is Strong, Healthy, and Expanding

The JOLTs, Challenger, and Initial Claims data align with labor market strength. The JOLTs data on job openings rose by nearly 400 basis points in November, contrary to an expected contraction. This outpaced the consensus and indicated sufficient job openings to fuel economic expansion.

The December Challenger figures are more interesting, aligning with this year’s trend, up compared to last year, but showing a marked decline in Q4 layoffs compared to the prior quarter. While not an overly bullish indication, it suggests an end to recent labor market volatility will come soon and is compounded by the hiring data. December hiring plans were tepid at nearly 8,000 compared to September’s 403,000, the strongest month of the year. Still, they aligned with seasonal trends, falling in the middle of the expected range, with the hiring pace expected to accelerate as Trump policies take effect.

The most current and leading labor market data, initial jobless claims, is strong. The data, released just days before the NFP report, shows initial claims falling to a long-term low and total claims falling more than 2% compared to last year. This points to a sharp contraction in layoff activity at year’s end, aligning with the Challenger data to suggest an end to labor market volatility and a solid foundation for labor market expansion as the year progresses.

The Ten-Year Treasury Rockets Higher to Realign with the Rate Outlook

The impact of the labor market data on the market is the odds for interest rate reduction, as indicated by the CME FedWatch Tool, are falling. The odds for two cuts are less than 50%, and a single cut is questionable, an outlook reflected by the treasury yields. The yield on the ten-year treasury rose more than 100 basis points to set a 52-week high.

The treasury market shows some signs of resistance at this level, but it may not last long if other data is strong. The next critical puzzle piece is the CPI and retail sales data, which is due soon. Another month of hot inflation data could take a rate cut off the table and send the TNX back to 5.0% or higher.

The S&P 500 (NYSEARCA: SPY) pulled back in reaction to the news, but this knee-jerk reaction will likely be viewed as a buying opportunity in hindsight. Hot labor market data and the underlying cause, economic health and expansion, are suitable for consumer health, spending, and S&P 500 profits across sectors. The critical support target is near recent lows at 5,875 and unlikely to break.

The more likely scenario is the market will fire a buy signal soon, sending the S&P 500 up to set a new all-time high. The risk is that the FOMC will have to increase rates later this year to combat inflation, increasing the odds of an economic crash-landing and recession.

SP price chart