Rate-Cut Hopes Dim Further After Jobs Report

The Federal Reserve's (Fed) rate-cutting cycle, which had been a beacon of hope for investors, has taken a significant hit following the release of the December jobs report. The report, which showed a robust increase of 256,000 jobs and a decrease in the unemployment rate to 4.1%, has reduced the likelihood of further rate cuts in 2025. Financial markets are now pricing in a 26% chance that 2025 will come and go without any more rate cuts, double the 13% chance the day before the jobs report (CME Group's FedWatch tool).

The strong jobs report has led many to question whether there will be any rate cuts at all in 2025. This shift in market expectations reflects the reduced likelihood of rate cuts due to the strong jobs report. The Fed's reluctance to cut rates is unlikely to please incoming president Donald Trump, who has said interest rates are too high.

The robust December employment report is another piece of economic data that suggests the Federal Reserve will move to the sidelines for a while. We foresee them keeping rates steady throughout the first half of the year. This means that borrowers, from those with credit cards to mortgages, will have to wait longer for borrowing costs to fall.



The sectors most likely to be affected by the Fed's decision to hold off on rate cuts are:

1. Financials: Banks and financial institutions benefit from higher interest rates, as they can charge more for loans and earn more on investments. However, if the Fed holds off on rate cuts, these institutions may not see the same level of growth as they would with lower interest rates. This could lead to slower growth in the financial sector.
2. Consumer Discretionary: This sector includes companies that sell non-essential goods and services, like retailers and restaurants. If the Fed holds off on rate cuts, consumers may have less disposable income due to higher borrowing costs, which could lead to reduced spending on discretionary items. This could negatively impact the consumer discretionary sector.
3. Technology: The tech sector is a bit trickier. Tech companies often rely on consumer and business spending, so a strong jobs report can be positive. However, if wage growth outpaces productivity, it can squeeze profit margins. If the Fed holds off on rate cuts, wage growth may continue to outpace productivity, putting pressure on tech companies' profit margins.
4. Real Estate: The real estate sector, including homebuilders and real estate investment trusts (REITs), could be negatively affected by the Fed's decision to hold off on rate cuts. Higher interest rates make mortgages more expensive, which can deter potential homebuyers and slow down the housing market. This could lead to slower growth in the real estate sector.

These sectors are most likely to be affected because they are sensitive to changes in interest rates and consumer spending, which are directly influenced by the Fed's monetary policy decisions.

The incoming Trump administration's policies, if enacted, are expected to be inflationary, which could prompt the Federal Reserve to hold off on cutting rates at its January 29 meeting. This is because the Fed's dual mandate is to keep inflation low and employment high, and inflationary policies would make it more difficult for the Fed to achieve its inflation target. If the Fed perceives that the incoming administration's policies will lead to higher inflation, it may choose to keep interest rates higher for longer to combat this inflationary pressure. This could have implications for borrowers, as higher interest rates make borrowing more expensive.

In conclusion, the strong jobs report has significantly reduced the likelihood of further rate cuts in 2025, dimming hopes for lower borrowing costs in the near future. The Fed's decision to hold off on rate cuts could have implications for various sectors, including financials, consumer discretionary, technology, and real estate. The incoming Trump administration's policies may also influence the Fed's rate decisions, potentially leading to higher interest rates and increased borrowing costs.