Unemployment Steady

STOCK INDEX FUTURES

The indexes are higher following December’s nonfarm payrolls report, which came in just below expectations. The economy added 50,000 new jobs, below forecasts of a reading of 66,000, while November’s figure was revised down from 64,0000 to 56,000. The unemployment rate moved down to 4.4% from the previous reading’s downwardly revised figure of 4.5%.

Employment continued to trend up in food services and drinking places and health care and social assistance. Meanwhile, federal government employment was little changed in December and employment showed little or no change over the month in other major industries, including mining, quarrying, and oil and gas extraction; construction; manufacturing; wholesale trade; transportation and warehousing; information; financial activities; professional and business services; and other services.

The Supreme Court’s ruling on Trump’s tariffs could potentially come later this morning, for which prediction markets are placing an unfavorable outcome for the Trump administration. Polymarket odds are pricing a 70% chance of an unfavorable ruling for the administration in the case. The Supreme Court announced that it would issue a set of opinions on Friday, though it did not disclose what cases it would be ruling on. The central question is whether or not the IEEPA grants the President the legals means and authority to impose tariffs.

CURRENCY FUTURES

US DOLLAR: The dollar is higher, little changed following December’s jobs report, which slightly pushed back rate cut expectations from the Fed. June is still favorable for an interest rate cut but market-implied odds shifted to later into the year. December’s report signaled a stable labor market, with employment growth remaining sluggish, while unemployment was little changed, reinforcing the narrative around a ”low-hire, low-fire” economy. ISM’s Services PMI data showed elevated price pressures for companies, but remained significantly below levels seen over the summer and fall. Inflation data will be instrumental in deciding Fed policy. Hotter prints could sway opinion at the Fed to hold out longer on cutting rates given that the labor market appears robust despite weaker hiring, which could very well be a result of a drop in labor supply. Currently, markets are pricing an 3% chance of a rate cut at the January meeting, with a rate cut not fully priced in until the June meeting.

EURO: The euro is lower against the dollar following December’s jobs report. Meanwhile, data showed that German exports unexpectedly fell in November as shipments to other European Union countries and the US dropped, while industrial output rose despite expectations for a decline. Germany’s exports fell 2.5% month-on-month to €128.1 billion in November, their lowest level since October 2024 . Exports to EU countries were down 4.2%, including a 3.9% decline to the euro area and a 4.8% drop to non-euro-area countries. Exports to the US saw a 4.2% decline. Meanwhile, shipments to China rose 3.4%. For the first eleven months of 2025, Germany’s total exports reached €1.44 trillion, up 0.9% from the same period in 2024. Other data revealed that Germany’s industrial output rose 0.8% month on month in November, easing from a revised 2.0% increase in October and beating forecasts of a 0.4% decline. The sustained growth was driven mainly by a sharp rebound in the automotive sector. Eurozone inflation broadly met expectations, supporting the view that the ECB is likely to keep policy steady. Headline CPI rose 2.0% year over year in December, while core inflation edged down to 2.3%, slightly below forecasts. French and German inflation both undershot expectations, with France at 0.7% and Germany at 1.8% year over year, the latter marking Germany’s first sub-2% reading since September 2024. A stronger euro in 2025 has contributed to disinflation, particularly by lowering import prices. Given the seeming divergence between central bank policy, data out of the US will serve as the primary catalyst for moves in the euro.

BRITISH POUND: The pound is little changed against the dollar. Traders will continue to focus on policy outlooks between the Fed and Bank of England as both central banks are expected to lower rates at least once in 2026. The Bank of England lowered rates by 25 bps last month, although officials at the bank cautioned that the pace of easing could slow as the bank does not want to jump the gun on inflation. The recent rate cut brought a tight 5-4 vote, with BoE Governor Andrew Bailey offering the tie-breaking vote.  Money markets suggest the next rate cut could come in April or June, with the latter meeting being fully priced in for a cut.

JAPANESE YEN: The yen continued to fall against the dollar, despite data that showed Japanese household spending grew in December, indicating that consumption increased before the Bank of Japan lifted its policy rate. Consumer spending rose 2.9%, internal affairs ministry data showed, far better than the median market forecast for a 0.9% drop. Governor Kazuo Ueda has said the BOJ would continue to raise borrowing costs if economic and price developments move in line with its forecasts. Still, the underlying trend of inflation outpacing wage growth has not changed. Separate labor ministry data from Thursday showed inflation-adjusted real wages fell 2.8% in November from a year earlier.

AUSTRALIAN DOLLAR: The Aussie is lower against the dollar, maintain overnight weakness as December’s labor revealed a stable labor market in the US, dispelling any pressing near for a near-term rate cut. Data out on Wednesday showed that consumer prices rose 3.4% on the year in November, below forecasts for 3.6% and a drop from October’s reading of 3.8%. Trimmed mean CPI, which is a key measure of core inflation for the Reserve Bank of Australia, rose 0.3% in November and 3.2% for the year, staying well above the target 2%. Capacity utilization, housing demand, facets from GDP data, and other indicators have all recently posted hotter-than-expected readings, leading some at the RBA to signal that an interest rate hike could be on the table soon. Still, the central bank sees the monthly inflation figures as volatile and places greater emphasis on its quarterly inflation report, which is due in late January.

INTEREST RATE MARKET FUTURES

Yields are higher at the front-end and lower at the long-end in a flattening move following December’s labor report. Most categories in the report saw little changes and reinforced the narrative of a cooling, but stable labor market. Policymakers at the Fed are likely to question what level of hiring is required to maintain a stable unemployment rate, given that December’s unemployment figure edged back down to 4.4%. Unemployment by demographic group showed  little to no change, signaling no signs of stress emerging unevenly. Some groups are more likely to feel unemployment first, which can often serve as a leading indicator on labor market weakness. Average hourly earnings grew 0.3% in December, landing the year-over-year figure at 3.8% wage growth, above expectations of 3.6%, while November’s figure was revised higher to 3.6%.

The question regarding what is a cooling labor market and one that is cooling faster than expected remains at the center of monetary policy debate and signals on how the labor market is walking that line will likely serve as the best indicator on future Fed moves. Officials at the Fed are likely to acknowledge a stable labor market after today’s report, which could offer more time to maintain rates at current levels as they monitor moves in consumer prices. Inflation still rests well above the Fed’s 2% target and November’s report did little confirm that inflation is slowing, as the data collection process potentially biased the figures downwards.

December’s payrolls data compliments the JOLTS data and reaffirmed labor market themes of reduced demand for labor and a lack of firing/layoffs, while ISM’s out earlier in the week points to a potential upside in economic momentum. ISM’s Manufacturing PMI survey reported shrinking factory activity in the US for the tenth month in a row, while price pressures stabilized but remained elevated. Elsewhere in the JOLTS data, revisions to October’s figures saw increases in hiring and quits categories, while reporting downward revisions to the number of open jobs and layoffs.

The spread between the two- and 10-year yields is 67.20 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.500%.

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