Analysis: Unexpected decline in unemployment rate sharply dampens rate cut expectations, bond traders shift focus to mid-year actions

Deep Tide TechFlow News, January 09: U.S. Treasury yields fell, with traders nearly erasing bets on a rate cut by the Federal Reserve later this month. Previously, the decline in the December unemployment rate exceeded expectations, offsetting the weak growth in overall employment. After the report was released on Friday, U.S. government bond prices declined, pushing up yields across all maturities by as much as 3 basis points. Bond traders maintained their forecast of two rate cuts in 2026, with the first expected to occur mid-year.

John Briggs, Head of U.S. Interest Rate Strategy at Natixis North America, said: “For us, the Fed is more focused on the unemployment rate rather than noise in the overall data. So, in my view, this is slightly bearish for U.S. interest rates.” Previously, due to the six-week government shutdown from October 1 to November 12, the labor reports for September, October, and November were delayed. This employment data provides the first “clean” reading that reflects macroeconomic employment trends.

Whether the Fed will further cut rates depends on the performance of the labor market in the coming months. Previously, to address a soft labor market, the Fed has lowered the target range for short-term borrowing rates at the past three meetings. However, some officials remain concerned about inflation remaining above the target, which is seen as limiting further easing steps. (Jin10)