Strong US Jobs Report Reshapes Fed Rate Cut Timeline
Treasury prices declined, with shorter maturities leading the drop, after robust US employment figures prompted traders to scale back their forecasts for Federal Reserve interest-rate reductions this year. The unexpected strength in the labor market data caught investors off guard, driving yields broadly higher on Wednesday.
Yield Movements and Market Reaction
The two-year Treasury yield, highly sensitive to shifts in central bank policy, surged as much as 9.5 basis points to 3.55% before settling at 3.5%. Meanwhile, benchmark 10-year yields increased by approximately 2 basis points to 4.16%. This uptick followed a $42 billion auction of these securities, where demand fell short of market expectations.
Traders had anticipated weaker labor-market numbers, influenced by recent soft economic indicators and comments from Trump administration officials hinting at leaner job figures ahead. John Briggs, head of US rates strategy at Natixis, noted, "The market came into this expecting a weak number and got the opposite. As for market pricing of cuts, it's falling as one would expect given the Fed's focus on the labor market."
Revised Fed Rate Cut Expectations
Following the data release, interest-rate swaps indicated traders see less than a 5% probability of a rate cut at the Fed's March meeting. Market pricing now reflects a total of 53 basis points of policy easing by December, down from 59 basis points on Tuesday. Traders have adjusted their timeline, now anticipating the next rate reduction in July, a shift from the previous expectation of June.
Gennadiy Goldberg, head of US interest-rates strategy at TD Securities, commented, "The data suggests that the Fed remains in no rush to cut interest rates in the near-term. However, markets will struggle to price out all cuts this year as we believe the stronger reading signals a delay of cuts, rather than the Fed unlikely to cut this year." He expects 10-year Treasury yields to remain pressured within a range of 4.10% to 4.30%.
Labor Market Details and Broader Context
The January non-farm payrolls report, delayed due to a brief government shutdown, showed an increase of 130,000 jobs, nearly double the median estimate from economists surveyed by Bloomberg. The unemployment rate dipped to 4.3% from 4.4%. This robust performance supports Fed officials advocating for a pause in rate adjustments after three cuts in the previous year aimed at bolstering the labor market.
Cleveland Fed President Beth Hammack, who opposed the December cut and will vote on policy decisions this year, stated that interest rates could remain on hold as officials assess incoming economic data. Dallas Fed President Lorie Logan expressed hope for continued inflation declines but emphasized that "material" labor market weakness would be necessary to justify further rate cuts.
Impact on Fed Leadership and Wall Street Forecasts
The strong data has sparked speculation about how Kevin Warsh, President Donald Trump's nominee to succeed Jerome Powell as Fed chair, might approach monetary policy. Subadra Rajappa, a strategist at Societe Generale, observed, "Warsh might have a harder time convincing the hawks to vote for cuts, if that is in fact his bias. The strong headline and uptick in wages argues for a more cautious approach to policy."
Several major Wall Street banks have revised their Fed rate cut predictions in response to the jobs report:
- CIBC Capital Markets now expects two reductions in June and July, instead of March and June.
- TD Securities economists have pushed back their forecast for the next cut to June from March.
- Citigroup Inc. anticipates rate moves in April, July, and September.
This shift marks a significant recalibration in market expectations, highlighting the ongoing tension between economic data and monetary policy adjustments.
