Before the strong US jobs report at the end of last week, traders had priced in the first rate cut for June this year. Overall, market players were looking for ~42 bps going into Friday at the time. Fast forward to today and the landscape has changed dramatically.
As things stand, Fed funds futures show just ~26 bps of rate cuts total for the year. And that's only fully priced in by December (one can argue for September or October as it shows ~88% or ~96% odds respectively by then). But it's only in January, so I wouldn't put too much confidence in the exact prices for that.
However, what stands out is that traders are no longer confident that the Fed will cut rates in the first half of the year. And that's the main takeaway after last week's labor market data. So what's next?
I would argue that what Friday's data did was reaffirm the Fed association from December. And that means stopping rate cuts for now. But this is probably the peak in terms of where we are in terms of recognizing stronger data in holding the Fed back.
The other major risk factor in play is Trump's policies, especially on trade. The fear now is that, with strong US data, there will be a risk of a tariff war fanning the flames of inflation in the coming year(s).
Given the market prices, I would say that traders are already taking care of a large part of that risk. So, it will be up to Trump to follow through on that.
And as mentioned, we may be close to reaching the end of that. But it is best to remember that the US economy is still the cleanest shirt among the dirty laundry. And that also counts for something that could be fueling the dollar to start the year.
The tail risk to that is Trump's tariffs not living up to the hype. And we got an early taste of that last week, where the withdrawal can be quite sharp and squeezy. It came after this report herewhich was soon rejected by Trump after.
