Investors have moved to price in a high likelihood of another interest rate increase from the US Federal Reserve in December, after stronger-than-expected jobs data pushed Treasury yields higher. Money markets indicated roughly an 80% chance of a quarter-point hike at the Fed’s December meeting, according to Reuters on Monday.
US employers added 165,000 jobs in October, well above forecasts of about 60,000 to 65,000, with earlier months revised up by a combined 84,000, according to the Labor Department data reported on Friday. Several Fed policymakers have since signalled that further tightening may be needed to bring inflation down.
The shift in expectations comes ahead of October consumer price data due on Tuesday, which is likely to be the next key test for the rate outlook. A December hike would move the federal funds target range to 4.00%-4.25% from its current 3.75%-4.00%.
Key Takeaways
- Markets are pricing roughly an 80% probability of a quarter-point Fed rate rise in December.
- October payrolls rose by 165,000, far above forecasts, with upward revisions of 84,000 to prior months.
- The two-year Treasury yield climbed to about 4.51% and the 10-year to around 4.86% after the data.
- US consumer price figures for October, due on Tuesday, are the next major input for policymakers.
Strong Payrolls Revive Hike Bets
The October employment report surprised markets on several fronts. Alongside the headline gain of 165,000 jobs, average hourly earnings rose 0.4% on the month and the unemployment rate stood at 4.1%, according to the data cited by 24/7 Wall St and Saxo.
The probability of a 25 basis point increase in December rose to about 77% after the data, according to CME FedWatch figures, and edged towards 80% by Monday. These probabilities are derived from futures pricing and do not represent guidance from the central bank.
The data marked a sharp turnaround from concerns that the labour market was cooling. Earlier in the month, markets had been focused on political developments, as seen when the dollar slid amid the midterm results as Democratic gains lifted the euro and sterling.
Fed Officials Signal Further Tightening
San Francisco Fed President Mary Daly said the central bank is likely to need to tighten policy further to bring inflation back to target, while favouring a gradual approach, according to reports. New York Fed President John Williams and St. Louis Fed President Alberto Musalem have also backed further rate increases, Saxo noted in its market commentary.
Musalem had already indicated at the end of October that the Fed may need to return to raising rates, according to CNBC. The comments suggest that a growing number of policymakers see the risk of persistent inflation as outweighing concerns about slower growth.
The Fed is not alone in leaning towards tighter policy. Other central banks have also moved to address inflation, including the Reserve Bank of Australia, which raised its cash rate to an 18-year high earlier this month.
Bond Yields and Markets Adjust
The two-year Treasury yield, which is particularly sensitive to policy expectations, rose about five basis points to 4.51% on Friday, while the 10-year yield climbed to around 4.86%, according to market data reported by Saxo and 24/7 Wall St. The dollar strengthened broadly after the report.
Asian equities rebounded on Monday, with Japan’s Nikkei rising more than 2% and Taiwan’s benchmark gaining about 5% after heavy losses the previous week, according to Reuters. Brent crude fell about 2% to around $96 a barrel after US President Donald Trump said new strikes on Iran were unlikely while talks continued.
Markets will also be watching the Fed’s final policy meeting of the year on 8-9 December. Until then, each major data release is likely to move expectations for the scale and timing of further tightening, keeping volatility elevated across rate-sensitive assets.
Inflation Data Takes Centre Stage
Tuesday’s consumer price report will be closely scrutinised for signs that price pressures are easing or broadening. A firm reading would likely reinforce expectations of a December hike, while a softer figure could prompt investors to scale back some of their bets.
Looking ahead, the path of US interest rates appears increasingly tied to the next few data releases, including inflation and producer prices later this week. With markets already pricing a high chance of tighter policy, any surprise in the figures could trigger significant moves in Treasury yields, the dollar and broader financial markets.
