The initial jobless claims fell to the lowest level in 11 months! The market begins to bet that the Federal Reserve will not cut interest rates in 2025

According to Zhitong Finance APP, last week the number of initial jobless claims in the United States unexpectedly decreased, reaching the lowest level in 11 months, indicating that the U.S. labor market remains resilient in early 2025, despite some laid-off American workers struggling to find new jobs. Overall, the recent trend in initial jobless claims shows slight signs of cooling, occasionally aligning with U.S. non-farm payroll data, but the overall expectation for the U.S. labor market remains robust.

Stable labor market data, combined with recently released figures showing a thriving service sector and overall price increases, has led some interest rate futures traders to firmly believe that the U.S. economy is achieving a soft landing with good growth momentum, while also betting on a resurgence of inflation. As a result, these traders are wagering that the Federal Reserve may not cut interest rates in 2025.

Data released by the U.S. Department of Labor on Wednesday showed that for the week ending January 4, the number of initial jobless claims fell by 10,000, seasonally adjusted to approximately 201,000, compared to economists' expectations of 218,000 initial claims.

The latest statistics on continuing jobless claims remain near the highest level in over three years, indicating that it takes longer for unemployed individuals to find work. The continued decline in initial jobless claims suggests that companies choosing to lay off employees are still very few, with many companies preferring to raise salaries to retain high-quality staff. These two latest data points outline a slightly cooling labor market, but there has yet to be a "labor fracture" that threatens the U.S. economy. For the week ending December 28, 2024, the number of continuing jobless claims in the U.S. rose to 1.867 million, while the previous period's continuing claims were revised down to 1.834 million.

This data report was released a day early because the U.S. federal government office was closed on Thursday in honor of former President Jimmy Carter, who passed away on December 29 at the age of 100.

Is the "inflation beast" making a comeback?

Despite the fact that initial jobless claims tend to be unstable at the turn of the year, they have rebounded to optimistic levels associated with low layoff rates, supporting the U.S. labor market as well as broader U.S. consumer spending and the ongoing strong growth of the U.S. economy.

Government data released on Tuesday showed that job vacancies in the U.S. unexpectedly increased in November, indicating that each unemployed person faces 1.13 available positions, up from 1.12 in October. Coupled with the service sector PMI showing that the thriving service sector continues to drive U.S. economic growth, this highlights the stability and strong resilience of the U.S. labor market. However, these strong data points have also raised market concerns about a resurgence of inflation, prompting the interest rate futures market to significantly reduce expectations for Federal Reserve rate cuts in 2025 and raise expectations for the Fed's neutral interest rate, leading to a collective pullback in the three major U.S. stock indices on Tuesday Given the favorable employment market conditions, even amidst the uncertainty surrounding the policies proposed by the incoming U.S. government under President Donald Trump, the likelihood that Federal Reserve policymakers will maintain interest rates unchanged in January is very high.

Trump has promised significant tax cuts for American businesses, imposing or significantly raising tariffs on imported goods, and deporting millions of undocumented immigrants. Economists warn that these plans will once again trigger a substantial rise in U.S. inflation rates.

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

Expectations for Rate Cuts Cool Again

In December's 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, as indicated in the "dot plot" released in December, compared to the four cuts predicted when the policy easing cycle began in September.

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

Although the number of layoffs remains very low by historical standards, recent data shows that corporate hiring activity has slowed, leading to some laid-off employees experiencing prolonged unemployment. Claims reports indicate that the number of people continuing to receive unemployment benefits increased by 33,000 in the week ending December 28, adjusted for seasonal variations, totaling 1.867 million, marking the latest indicator of cooling hiring activity.

Part of the increase in the number of continuing unemployment claims is due to the difficulty in removing seasonal fluctuations from the data. Given that the median duration of unemployment in November was close to a three-year high, economists hope that the situation will improve when the U.S. government releases the highly anticipated December employment report on Friday.

A Reuters survey showed that non-farm payrolls in December may have increased by 160,000, as the disruptions caused by hurricanes and the Boeing (BA.US) factory workers' strike came to an end, providing a significant boost to the job market, while the negative employment impacts from another aerospace company gradually faded.

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

The CME FedWatch Tool indicates that interest rate futures traders expect the total rate cut this year to reach about 30 basis points, suggesting that traders generally bet that the Federal Reserve's rate cuts this year will not exceed 25 basis points, with the first cut not expected until 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 currently a professor at Harvard University, believes that if the U.S. labor market remains healthy, the Federal Reserve may only lower the benchmark interest rate once this year. He also pointed out that the Federal Reserve has entered a new phase where "a compelling reason" is needed to cut interest rates