The Weekly Bottom Line
Our summary of recent economic events and what to expect in the weeks ahead.
Date Published: January 10, 2025
- Category:
- U.S.
Highlights
- U.S. Treasury yields have jumped yet again, after another payrolls report topped expectations.
- If the economy can manage this level of interest rates without losing much momentum, the need for additional rate cuts becomes an open question.
- The Trump administration is set to take over on January 20th, with tariffs top-of-mind.
Little Sign of Slowing Down
U.S. Treasury yields have jumped yet again, after another payrolls report topped expectations, buoyed by healthy economic momentum through to the end of the year. For policymakers looking to fine tune the path of policy rates through 2025, the data confirm their suspicions of an economy that continues to charge ahead, despite elevated interest rates.
All eyes were on December’s labor market report and boy did it deliver. A whopping 256k new jobs added, almost 100k more than consensus expectations. The household survey also showed gains, pushing the unemployment rate back down to 4.1%. This isn’t far off from the 4.2% median expected to close out 2024 in the FOMC’s last set of projections, but it does confirm that the unemployment rate has been virtually unchanged since June of 2024 (Chart 1). Put another way, after rising from a low of 3.4% in April 2023 to 4.2% in July 2024, the unemployment rate has been steady over the past five months despite still elevated interest rates. If the economy can manage this level of interest rates without losing much momentum, the need for additional rate cuts becomes an open question.
The remarkable resilience of the labor market was noted by a series of Fed speakers this week. Their assessments of how restrictive interest rates currently are varied, but all advocated for a measured approach to setting policy in the coming months. In fact, comments by Governors Bowman and Cook both used some version of the word “cautious” on the pace of further interest rate cuts. Based on today’s data, markets have pushed out expectations for the sole cut of 2025 to the back half of the year, implying that the pace of rate cuts could be nearing a virtual stand-still.
Adding to the uncertainty is the prospect of renewed inflationary forces. The Trump administration is set to take over on January 20th, with tariffs top-of-mind. How these could pass-through to the economy will depend on their structure and how trade partners retaliate. However, the ISM services survey already showed a large jump in its input price index as firms looked to pre-empt any possible trade action. Layer on a healthy domestic economy, and we could see firms more willing to pass on additional costs than prior to the pandemic.
With policymakers committed to a data-dependent approach to setting rates, the focus shifts to next week’s CPI and retail sales reports. The information for December thus far suggests that the U.S. economy has shrugged off the 4.5% policy rate, and we could see some upside surprise. Survey measures from the ISM showed a notable uptick in growth to close the year (Chart 2), while the three-month average of job gains rose from 113k in August to 170k in December.
As 2025 gets underway, if things keep going like this, the balance of risks now suggests that the Fed may not have much more to do.
Disclaimer
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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