Yields Dip on 'Less Bad' Data: The Expectation Gap for December

The core event was a jobs report that confirmed deep weakness but was, in the market's view, "less bad" than the worst-case scenario. November saw a net loss of 64,000 jobs, while an abbreviated October count showed a much steeper drop of 105,000. The unemployment rate jumped to 4.6%, its highest level in over two years. This was the data the market had been braced for, and the initial reaction was a slight relief rally in bonds. Yields fell, with the benchmark 10-year Treasury dropping more than 3 basis points to 4.151%.

The key expectation gap here was between the feared "worst-case" and the actual print. The data was bad, but not catastrophically worse than the already-dismal October revision. This "less bad" reality was enough to push yields lower, as traders adjusted their immediate risk assessment. Yet the mixed picture-sharp job losses but a still-elevated unemployment rate-left the Fed's path uncertain. The market's immediate move was a classic "buy the rumor, sell the news" dynamic on the downside: the worst fears were priced in, and the report merely confirmed them, leading to a modest relief in yields.

Fed Chair Jerome Powell's comment that the report was likely affected by shutdown-related distortions was critical. It effectively told the market to discount the data's weight. As Goldman Sachs noted, the Fed "is unlikely to put much weight on today's report". This guidance reset expectations, shifting focus to the next data point-the December jobs report due in early January. For now, the November print was a reality check that was already priced in, leaving the forward view unchanged.

Current Expectations: The December Whisper Number

The market's focus has now shifted to the immediate catalyst: Friday's December jobs report. Economists are forecasting a modest gain of 54,000 new jobs. This number is the new "whisper number" the market is betting on to reset the trajectory. It represents a clear improvement from the November print of a 64,000 job loss, but it is still far from robust. The expectation is for a "less bad" report, not a strong rebound.

This forecast sets up the next major expectation gap. If the December print meets or beats 54,000, it could signal a stabilization in the labor market, potentially giving the Fed more room to hold rates steady. A miss, however, would reinforce the narrative of persistent weakness and likely pressure yields higher. For now, the market is pricing in a modest recovery, and the report will test whether that priced-in optimism is justified.

Adding context to the data, the Federal Reserve Bank of New York will launch a new tool on Thursday. The Heise, Pearce, Weber (HPW) Labor Market Tightness Index aims to provide a more accurate measure of wage pressures by incorporating the behavior of both unemployed and employed workers. This new index, which uses the quits rate and job vacancies, is designed to reduce the noise in traditional labor market data. Its debut just before the jobs report underscores the market's need for clearer signals on inflation and policy.

Yields and the Fed Bet: What's Priced In Now

The market's current position is a study in conflicting signals. After the November jobs report, yields fell sharply, with the benchmark 10-year Treasury dropping to 4.151% and the 2-year at 3.485%. This move reflected the "less bad" reality being priced in. Yet, the market's forward view is now caught between two forces: the dovish pressure from weak data and the hawkish headwind from geopolitical risk.

The dominant expectation is still for a dovish Fed. Fed funds futures traders see a 24% chance of a rate cut in January, unchanged after the report. This probability, while low, shows the market is still pricing in some policy easing. The logic is straightforward: softer data typically pressures yields lower as it increases the odds of future cuts. The expectation is that the December jobs report, forecast to show a modest gain, will provide the next signal on whether this trajectory holds.

Yet, that expectation is being tested. On Tuesday, yields moved higher despite the weak data, with the 10-year climbing to 4.179%. The culprit was heightened geopolitical risk in Venezuela, where U.S. strikes and the capture of President Maduro created a new source of uncertainty. This event provided a clear counterweight, demonstrating how external shocks can override the typical bond market reaction to economic news. It's a reminder that yields are not just a function of domestic data but also of risk premiums.

The bottom line is that current yields reflect a market in a holding pattern. The "less bad" November data has been digested, but the path forward remains unclear. The market is pricing in a low probability of an immediate cut, yet it is also sensitive to any new risk. The upcoming December jobs report is the next catalyst that will determine whether the dovish pressure or the geopolitical headwind wins. For now, the 24% cut probability and the volatile yield moves show a market waiting for the next piece of reality to confirm or contradict its fragile equilibrium.

Catalysts and Risks: The Path to 2026

The market's current holding pattern will only resolve with new data. The immediate catalyst is Friday's December jobs report, where the market is betting on a modest gain of 54,000 new jobs. This forecast is the new benchmark. A print that meets or beats that number would signal stabilization, supporting the dovish narrative and likely keeping yields under pressure. A miss, however, would confirm persistent weakness and likely push yields higher, resetting the Fed policy path.

Beyond the headline, Thursday brings two other data points that could influence the setup. The November CPI report is expected to show inflation rising to 3.1% year-over-year, providing a check on the disinflation story. At the same time, the latest weekly jobless claims will offer a real-time pulse on labor market stress. Together, these reports will feed into the expectation gap for the December print.

Adding a new tool to the mix, the Federal Reserve Bank of New York will launch the Heise, Pearce, Weber (HPW) Labor Market Tightness Index on Thursday. This new index, which uses the quits rate and job vacancies to measure wage pressures, is designed to reduce the noise in traditional labor data. Its debut is a direct response to the market's need for clearer signals on inflation and policy. If it gains traction, the HPW Index could become a key barometer for the Fed and traders, potentially sharpening the focus on underlying labor market health rather than just headline payrolls.

The path to 2026 hinges on these near-term events. The market has priced in a low probability of an immediate cut, but it is also sensitive to any new risk. The upcoming data will test whether the fragile equilibrium holds or if a clearer signal emerges to drive yields in a new direction.