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The Weekly Bottom Line

Our summary of recent economic events and what to expect in the weeks ahead.

Date Published: January 10, 2025

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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


Chart 1 shows the U.S. civilian unemployment rate. The Chart shows that the unemployment rate has stopped rising since mid-2024.

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.

Chart 2 shows the three-month moving average in the ISM Composite Index. The chart shows that the index has risen meaningfully in the past three months, suggesting that growth in the US economy has accelerated to close out 2024.

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.

Andrew Hencic, Senior Economist | 416-944-5307

 

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