Last week, the number of initial jobless claims in the USA unexpectedly decreased, reaching the lowest level in 11 months, indicating that the labor market in the USA remains resilient at the beginning of 2025, even though some laid-off workers are finding it difficult to secure new employment. Overall, the recent curve of initial jobless claims occasionally shows slight signs of cooling, but aligns with the expectation that the labor market in the USA remains extremely resilient.

Stable labor market data, coupled with recent reports indicating a thriving service industry and rising overall prices, have led some Interest Rates traders to firmly believe that the USA economy is on track for a soft landing with good growth momentum, while also betting on the return of inflation. Therefore, these traders are wagering that the Federal Reserve may not lower interest rates in 2025.

Data released by the US Department of Labor on Wednesday showed that for the week ending January 4, the number of first-time applications for unemployment benefits decreased by 10,000 to approximately 0.201 million after seasonal adjustment, compared to economists' general expectation of 0.218 million initial claims.

The latest Statistics on continued unemployment claims remain near the highest level in more than three years, indicating that it takes longer for unemployed individuals to find jobs. The continuous decline in initial claims suggests that there are still very few companies choosing to lay off workers, and many companies prefer to raise salaries to retain high-quality employees. These two latest data points paint a picture of a slightly cooling labor market, but no ‘labor gap’ has emerged that would threaten the stability of the USA economy. For the week ending December 28, 2024, the number of continued unemployment claims in the USA rose to 1.867 million, while the previous period's continued claims were revised down to 1.834 million.

This data report was released one day early because the US federal government office was closed on Thursday in memory of former President Carter's passing on December 29 at the age of 100.

Is the "Inflation Beast" making a comeback?

Although the initial claims for unemployment benefits are often unstable at the turn of the year, they have risen to an optimistic level associated with low layoff rates, supporting the USA labor market as well as broader USA Consumer spending and the continuing strong growth of the USA economy.

Data released by the government on Tuesday showed an unexpected increase in job vacancies in the USA in November, indicating that each unemployed person faces 1.13 job vacancies, up from 1.12 in October, compounded by the services PMI indicating the industry boom continues to drive USA economic growth, highlighting the stability and resilience of the USA labor market. However, this strong data has also raised market concerns about the return of inflation, prompting the Interest Rates futures market to significantly cut the Federal Reserve's rate cut expectations for 2025 and raise expectations for the Federal Reserve's neutral rate, leading to a collective large adjustment of the three major USA stock indices on Tuesday.

Given the good state of the employment market, even amid uncertainties surrounding the policies proposed by the incoming Trump administration, there is a very high probability that Federal Reserve policymakers will maintain interest rates unchanged in January.

Trump has promised significant tax cuts for USA businesses, imposed or dramatically increased tariffs on imported goods, and expelled millions of undocumented immigrants. Economists warn that these plans will once again lead to a sharp rise in USA inflation.

The chief economist of Apollo Global Management, Torsten Slok, warned on Tuesday that there are growing concerns about how the USA will manage its expanding debt and inflation expectations under increased tariffs. This economist also estimated that the likelihood of the Federal Reserve resuming rate hikes in 2025 could be as high as 40%.

Interest rate cut expectations cool down again.

At the December monetary policy meeting, the Federal Reserve lowered the benchmark overnight rate by 25 basis points to a Range of 4.25%-4.50%. However, Fed officials generally expect only two rate cuts this year in the "dot plot" released in December, whereas the general forecast was four cuts at the start of the policy easing cycle in September.

From 2022 to 2023, the benchmark policy interest rate set by the Federal Reserve was raised by 5.25 percentage points to curb the most intense inflation rates in decades.

Although the number of layoffs remains very low by historical standards, several recent indicators show that corporate hiring activities have slowed, leading to some laid-off workers experiencing prolonged unemployment. Claims reports indicate that in the week ending December 28, the number of continuing unemployment benefit recipients increased by 0.033 million, seasonally adjusted to 1.867 million, marking the latest sign of cooling hiring activities.

Part of the increase in the number of continuing unemployment benefits claims is due to the difficulty of seasonally adjusting the data. Given that the median duration of unemployment in November was close to a three-year high, economists hope that when the U.S. government releases its closely watched December employment report on Friday, the situation will show improvement.

A Reuters survey shows that nonfarm payrolls may have increased by 0.16 million in December, as the end of disruptions caused by hurricanes and the Boeing (BA.US) factory workers' major strike provided a significant boost to the labor market, while the negative employment impacts from another aerospace company gradually faded.

On Tuesday, Eastern Time, bolstered by strong job vacancy data and services PMI data, the 10-year U.S. Treasury yield, known as the 'anchor for global asset pricing,' further reached its highest level in eight months. The bets and games on Wall Street regarding the Federal Reserve's interest rate direction seem to have shifted from several rate cuts in 2025 to whether any cuts will still occur.

CME's FedWatch tool indicates that interest rate futures traders expect interest rate cuts this year to total approximately 30 basis points, suggesting that traders generally bet that the Federal Reserve's rate cut this year will not exceed 25 basis points and that the first cut will occur in July; about one-third of traders bet that the Federal Reserve will choose not to cut rates throughout 2025.

Jason Furman, a former senior economist in the Obama administration and current Harvard University professor, believes that if the U.S. labor market remains healthy, the Federal Reserve may only cut the benchmark rate once this year. He also noted that the Federal Reserve has entered a new phase where 'convincing reasons' are needed to justify a rate cut.

Editor/lambor