U.S. employers hired workers more than anticipated and increased wages steadily in December of 2023, causing uncertainty about the financial markets' expectation of the Federal Reserve on interest rate cuts in March.
Treasury Data
The 10-year Treasury yield increased by six basis points to 4.051%, surpassing the significant 4% level after initially decreasing earlier. Meanwhile, the 2-year Treasury yield increased by two basis points to 4.4%. It's important to note that yields and prices move in opposite directions, and one basis point equals 0.01%.
Job Market Weakness
The widely observed employment report from the Labor Department on Friday revealed some weaknesses, as the economy had 71,000 fewer jobs added in October and November than initially reported. Although the unemployment rate remained at 3.7% last month due to 676,000 individuals leaving the labor force, the participation gains have almost been wiped out since February, when household employment declined significantly, and the average workweek was slightly shorter than in November. The economy avoided a recession last year and is expected to keep growing through 2024, buoyed by the labor market's resilience that supports consumer spending despite the challenges, as suggested by the reports.
"A gradual labor market cooldown remains in place, however, the lingering labor market resilience and strength in wage growth could keep the Fed on the sidelines for longer than the markets currently expect." said Scott Anderson, chief U.S. economist at BMO Capital Markets in San Francisco.
Non-Farm Payroll Data
According to the Labor Department's Bureau of Labor Statistics, non-farm payrolls grew by 216,000 jobs last month, which predicted a 170,000 jobs increase. The economy experienced a notable decrease from the 4.8 million positions, adding 2.7 million jobs in 2022. The slowdown in job growth indicates reduced economic demand after the U.S. central bank implemented 525 basis points of rate hikes since March 2022, proving that approximately 100,000 jobs per month are required to sustain growth in the working-age population.
READ ALSO: Historic Wage Surge for November Hires, Suggesting a Tight Labor Market According to N.Y. Fed Report
Strong Job Market on Rate Cuts
A strong job market might delay the Federal Reserve from lowering interest rates, contrary to what some on Wall Street anticipated, possibly as early as March. The Fed hasn't specified a timeline. There is speculation that rate cuts may occur later than initially thought, supported by minutes from the central bank's December policy meeting, which indicated some uncertainty.
Deutsche Bank strategists, headed by Jim Reid, mentioned that the robust job numbers increase doubts about the Fed lowering interest rates in March. They noted that the probability of a 25-basis-point cut by March had decreased to 69% by Thursday's close, the lowest since the December meeting. As a result, Treasuries experienced a sell-off across the yield curve.
