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The U.S. economy created 256,000 jobs in December, beating expectations and sending long-term U.S. government debt yields to their highest levels since 2023.
Data released by the U.S. Bureau of Labor Statistics on Friday exceeded the 160,000 expected by economists polled by Reuters and was also higher than the 212,000 new jobs revised down in November.
U.S. Treasury yields climbed as investors bet the Federal Reserve will cut interest rates at a slower pace this year. Futures markets have pushed back expectations for a first-quarter rate cut to September from June before the data release. The likelihood of a second rate cut this year fell from about 60% to about 20%.
The two-year Treasury yield, which tracks interest rate expectations and moves inversely with bond prices, rose 0.11 percentage point to 4.37%. The benchmark 10-year Treasury yield rose 0.09 percentage point to 4.77%, the highest level since November 2023.
Stock futures fell, with contracts tracking the S&P 500 down 0.8%. The dollar gained 0.4% against a basket of six other currencies.
“This number emphasizes that the Fed doesn’t need to rush… It’s pretty much evidence that they should pause for a few months,” said Eric Winograd, chief economist at AllianceBernstein. “
He added that bond markets were already “on edge”.
Friday’s jobs data were eagerly anticipated by a sell-off in government bond markets on both sides of the Atlantic, in part due to growing expectations that the Federal Reserve will cut interest rates only slightly in 2025.
Chancellor of the Exchequer Rachel Reeves has come under increasing pressure this week as soaring government borrowing costs leave her with little room to meet her own fiscal rules.
British government bond yields climbed after the release of U.S. employment data. The 10-year Treasury yield rose to 4.88%, up 0.07 percentage points on the day, but below the 16-year high of 4.93% hit earlier this week.
U.S. President-elect Trump’s plans to cut taxes, impose tariffs and restrict immigration have also led the Federal Reserve to signal that it will be more cautious in 2025.
In December, the central bank forecast only two 25-basis-point rate cuts this year. In September, it forecast a 4-basis-point cut, in part because of continued strength in the job market.
Senior Fed official Jeff Schmid said on Thursday that the central bank is “very close” to achieving its inflation and employment goals, underscoring expectations that policymakers will avoid deep interest rate cuts this year.
The Federal Reserve began cutting key interest rates in September and will reduce them by a full percentage point by the end of 2024.
At its next meeting later this month, the Fed is widely expected to hold interest rates steady at a target range of 4.25% to 4.5%.
Friday’s data showed the unemployment rate was 4.1%, compared with 4.2% in November.
