December Payrolls Shifted the Focus to One Rate Cut

The US December payrolls report has influenced the trajectory of US money markets, now indicating only one additional 25 basis points (bps) rate cut by the Federal Reserve this year, rather than the previously expected two.

The job growth headline for December was +256,000, significantly exceeding the forecast of +165,000. This was the strongest job growth since March and came with minor revisions to prior months' data. Additionally, the unemployment rate dropped from 4.2% to 4.1%, accompanied by consistent wage growth of +0.3% month-over-month and +3.9% year-over-year.

This positive momentum could potentially set the stage for a rate hike should the upcoming January US Consumer Price Index (CPI) data exceed expectations, forecasting a 0.3% month-over-month increase (2.9% year-over-year) and a 0.2% month-over-month core inflation rate (3.3% year-over-year).

Inflation expectations, as observed in the January University of Michigan consumer survey released last Friday, reflected notable increases in both short-term (1-year expectations jumped from 2.8% to 3.3%) and long-term (5-10 year expectations rose from 3.0% to 3.3%) indicators. The short-term figure matched its highest level seen in 2024, while the long-term metric reached a peak not witnessed since 2008.

In the bond market, US Treasuries experienced a sell-off, with daily yield changes ranging from +1.7 bps for the 30-year bonds to +13 bps for the 3-year bonds. A technical resistance level at the 5% mark limited further increase at the long end of the yield curve. The US 10-year yield eclipsed the 2024 high of 4.73%, reflecting a rise of 7 bps.

Similarly, German Bunds and UK Gilts followed the general market trend, albeit at a slower pace. German yields increased between 1.3 bps for 30-year bonds and 5.4 bps for 3-year bonds, while UK yields rose by 2 to 4 bps across the curve.

As for the US dollar, it continued to gain traction, with the trade-weighted index (DXY) reaching 110 for the first time since November 2022. The EUR/USD exchange rate closed at 1.0244, having slipped from 1.03, and appears to be vying for crucial support at 1.0201, corresponding with a 62% retracement on its 2022-2023 recovery. Breaching this support level may indicate a trend back toward parity or below.

In related currency movements, the British pound faced more downward pressure, with EUR/GBP surpassing 0.84 amid concerns over fiscal policies and stagflation. Upcoming UK inflation data set to be released on Wednesday could further exacerbate these pressures on the pound.

On the stock market front, US stocks fell by 1.5% last Friday, as the ongoing rise in real yields takes its toll. Today's economic calendar is surprisingly devoid of significant data points.

Interestingly, Brent crude prices have surged from $77 to $81 per barrel following President Biden's announcement of the most severe sanctions on Russia's oil trade yet.

China's Trade Balance and Global Economic Forecasts

In other developments, China's trade balance saw a record increase in December, achieving a surplus of $104.84 billion, driven by double-digit growth in exports, contrasted by a mere 1% rise in imports. It appears that companies may have sped up shipments in anticipation of expected tariffs on imports under the impending Trump administration.

Exports to the US surged by 15.7% year-over-year in December, marking the highest growth since February 2024, while shipments to Asian markets and Europe rose by 19.2% and 8.8%, respectively. For the full year of 2024, China's exports grew by 5.9% year-over-year to reach $3.58 trillion, with imports seeing a 1.1% year-over-year increase to $2.59 trillion. This resulted in an unprecedented trade surplus of $992.1 billion.

As trade continues to significantly impact Chinese economic growth, private consumption has not yet shown the rebound that many hoped for. The yuan's exchange rate remains stable, hovering around USD/CNY 7.33.

The IMF Director, Kristalina Georgieva, concluded last week that the Fund anticipates steady global growth along with ongoing disinflation in its updated World Economic Outlook set for release on January 17. Georgieva noted that while the US economy is performing better than previously expected, there remains a high degree of uncertainty regarding the trade policies of the incoming Trump presidency.

In its previous forecast released in October, the IMF anticipated global growth of 3.2% for 2025. Furthermore, interest rates are expected to remain elevated largely due to developments in the US. As inflation approaches the Fed's 2% target, the central bank may opt to hold off on lowering policy rates.

However, varying trends are emerging across different regions, as the IMF predicted a slowing growth rate in the EU and a slight decline in India. Meanwhile, Brazil might experience heightened inflation in contrast to China's ongoing deflationary pressures and domestic demand challenges.

Payrolls, Economy, Federal, Growth, Inflation