The quiet of the first “non-farm night” of 2025 was shattered by an unexpected blast from the US labor marketThe latest non-farm payroll report revealed that in December 2024, the United States added 256,000 jobs, a figure that completely exceeded market expectations, which were set at 165,000. To add more intrigue, the unemployment rate also surprising dropped to 4.1% from the previous prediction and last month’s rate of 4.2%.

In the wake of this remarkable employment data, traders swiftly reduced their bets on a rate cut from the Federal Reserve within the first half of the yearInterest rate contracts linked to the Fed's meetings now suggest that the first 25 basis point rate cut may not arrive until the meetings set for September 2025, as opposed to the expected date of June prior to the data release

Bank of America warned that maintaining the pause on rate cuts was likely to become the central scenario for the Fed in January, especially if the job market no longer demonstrates signs of cooling.

As a direct result, the index of the US dollar skyrocketed, leading to a decline in non-USD currenciesMeanwhile, the bond market faced severe selling pressure, with the yield on 30-year Treasuries climbing to over 5% for the first time since November 2023. All three major stock indices in the US plunged: by 11 PM Beijing time, the Dow Jones was down 1.38%, the Nasdaq saw a significant drop of 2.2%, while the S&P 500 fell by 1.66%. Notably, the technology sector suffered, with shares of major corporations like Nvidia plummeting more than 4%.

US Non-Farm Data Shocker

On the evening of January 10, according to the US Bureau of Labor Statistics, December's non-farm payroll saw the creation of 256,000 jobs, an increase significantly above the anticipated 165,000, marking the largest growth seen in nine months

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Prior numbers were also revised downward, from an initially reported 227,000 to 212,000; the unemployment rate decreased to 4.1%, lower than both forecasts and the previous month’s 4.2%.

Analyzing the overall year, in 2024, the US saw a total increase of 2.2 million in non-farm payroll employment (an average of 186,000 additions monthly). While this marks a decrease from the 3 million jobs added in 2023 (which averaged 251,000 jobs per month), it still surpasses the 2 million jobs created in 2019.

The report indicated that average hourly earnings for American workers in December showed a year-on-year increase of 3.9% and a month-on-month growth of 0.3%. While the annual rate fell short of the expected 4%, the monthly rate met expectations, suggesting a cooling in the extent of “wage inflation”. Within this, wages for non-management workers rose minimally by 0.2% month on month (with annual growth recorded at 3.8%), the slowest increase since mid-2021.

Following the release of the non-farm data, the dollar index surged sharply with the maximum increase recorded at 0.74%, rising to a figure of 109.73. Other currencies dropped in value; by 10 PM Beijing time, the British pound fell by 0.7% against the dollar to 1.2225, its lowest since November 2023; the Australian dollar dipped 0.74%, the Euro fell by 0.47%, while the offshore Chinese Yuan made a slight recovery to 7.3612. Additionally, the dollar against the Japanese yen increased as much as 0.48%, peaking at 158.88, marking a six-month high.

In the bond market, aggressive selling ensued, leading the 2-year Treasury yield to rise to 4.36%, with the 10-year jumping to 4.77%, and the 30-year reaching above 5% for the highest level since November 2023.

Analysts explained that the creation of 256,000 jobs in December greatly exceeded market expectations, thereby supporting the argument for the Fed to slow its rate cuts.

In the aftermath of the employment data release, traders significantly reduced their forecasts regarding a Fed rate cut in the first half of 2025. The interest rate contracts related to the Fed’s meetings now reflect a change, predicting that the earliest 25 basis point cut may only occur in September 2025, quite a shift from the early June estimate prior to the report.

Furthermore, according to the CME's "FedWatch," the probability of the Fed maintaining its interest rate in January stands at 97.3%, while the chance of a 25 basis point cut rests at merely 2.7%. As for March, the likelihood of keeping the current rate unchanged is at 74.0% — up from 59.6% prior to the non-farm report, while the overall odds for a cumulative rate decrease of 25 basis points are now at 25.4% (down from 37.9%), and just 0.6% for a total cut of 50 basis points (also down from 2.5%).

Federal Reserve Chair Jerome Powell previously emphasized that as long as the job market and economy remain robust, the Fed can afford to be cautious regarding any further rate cuts.

After market opening, all three major US indices experienced a downward trend

As per the data at 11 PM Beijing time, the Dow Jones fell by 1.38%, the Nasdaq dropped by 2.2%, and the S&P 500 saw a decline of 1.66%. Notably, shares of chip makers were generally down, with Arm reported a steep drop of 6.94%, Nvidia’s two-times leveraged ETF dropped 5.97%, and other major tech companies like AMD and TSMC also recorded declines.

What's the Impact?

The unexpected release of these non-farm data sparked considerable discussion on Wall StreetPrincipal Asset Management noted that the latest job growth figures are favorable for the US economy and the dollar, but unfavorable for stocks while representing punitive news for global bond markets, particularly UK bonds.

Lindsay Rosner, head of fixed-income investments at Goldman Sachs Asset Management, stated that the robust performance of the employment report eliminates the possibility of a 25 basis point cut in January, and shifts focus toward the March meeting where further rate cuts would depend on inflation progress.

Bank of America economists Shruti Mishra and Aditya Bhave remarked, “A pause in rate cuts in January is clearly a baseline scenario for the Fed

We believe that if the labor market does not continue to gradually cool, the rate-cutting cycle may very well come to an end.”

Gregory Faranello, head of US interest rate trading and strategy at AmeriVet Securities, stated that this report supports market expectations that the Fed may skip this month’s meeting and possibly moreAt such a pivotal transition period between administrations, this data holds significant weightAll eyes are now on inflation, with the new administration possibly increasing the calls for rate hikes due to higher inflation figures and a robust job market.

Market analyst Enda Curran expressed that while this is not the final data for 2024 and may likely be revised, it confirms that the state of the US economy remains strong with companies actively hiring and job vacancies abundant

The negative aspect is that there are growing market concerns that progress against inflation may stagnate, and these outcomes do not support the Fed's dovish stance.

Robert Pavlik, an analyst at Dakota Wealth, pointed out that the addition of 256,000 jobs is beneficial to the average American, but a setback for Wall StreetThe market was hoping for the employment data to match expectations or come in weaker to signal the Fed to shift from a wait-and-see approach to cutting ratesInstead, this employment report did exactly the opposite, leaving the Fed unlikely to act, given that the economy seems to require no further easingIf the incoming president follows through with plans to remove between 15 to 20 million immigrants, it would likely lead to an increase in job vacancies.

Kevin Flanagan, head of fixed-income strategy at Wisdom Tree, mentioned that the continuing robustness of the US labor market makes it increasingly likely that the yield on the 10-year Treasury bond will surpass 5% soon.

Jack Mcintyre, an investment portfolio manager at Brandywine Global, indicated that the strong performance of the non-farm report has led to skepticism regarding whether the Fed will pursue further rate cuts in the first half of 2025. Nonetheless, inflation remains the most critical variable for both the Fed and the market, and the upcoming CPI data could be even more critical.