Initial unemployment claims fall to lowest level in 11 months! Market starts betting on the Federal Reserve not cutting interest rates in 2025.

The number of initial jobless claims in the United States unexpectedly decreased last week, hitting the lowest level in 11 months, indicating that the U.S. labor market still remains resilient at the beginning of 2025, despite some difficulties for laid-off American workers to find new jobs. Overall, the recent trend of initial jobless claims coinciding with occasional cooling signs in U.S. non-farm employment data suggests that the overall U.S. labor market remains consistent with expectations of resilience. Stable labor market data, combined with recent reports showing a thriving service sector and overall price increase, have led some interest rate futures traders to believe that the U.S. economy is achieving a soft landing with strong growth momentum. These traders are betting that inflation may come back, thus betting that the Federal Reserve may not cut interest rates in 2025. Data released by the U.S. Labor Department on Wednesday showed that in the week ending January 4, the number of initial jobless claims in the United States decreased by 10,000 people to approximately 201,000 after seasonal adjustment, compared to the economists' consensus forecast of 218,000 initial jobless claims. On the other hand, the latest continued claims for unemployment benefits continue to remain near the highest levels in over three years, indicating that it is taking longer for unemployed individuals to find work. The continuous decrease in initial jobless claims indicates that there are still very few companies opting for layoffs, with many companies still preferring to retain high-skilled employees by offering wage increases. These two latest data points paint a picture of a slightly cooling labor market, but a "labor crack" crisis in the U.S. economy has not yet emerged. In the week ending December 28, the number of continued unemployment benefit applications in the United States rose to 1.867 million people, with the previous period's data revised downwards to 1.834 million people. The data report was released a day earlier as the federal government offices were closed on Thursday in memory of former President Jimmy Carter, who passed away at the age of 100 on December 29. Will the "inflation beast" return? Although the number of initial jobless claims tends to be unstable at the end of the year and the beginning of the year, they have now rebounded to optimistic levels associated with low layoff rates, supporting the U.S. labor market, broader U.S. consumer spending, and sustained strong economic growth. Government data released on Tuesday showed an unexpected increase in job vacancies in the U.S. in November, indicating that every unemployed person had 1.13 job vacancies to choose from, higher than the 1.12 in October. Combined with the ISM Services PMI showing continued growth in the service sector driving U.S. economic growth, it highlights the stability and resilience of the U.S. labor market. However, these robust data points have also raised concerns about a potential return of inflation, leading to a significant reduction in market expectations of Fed interest rate cuts in 2025 and an increase in the Fed's neutral rate expectations, causing a large pullback in the major U.S. stock indices on Tuesday. Given the strong employment market conditions, and even in the backdrop of uncertainty about the policy impact of the incoming Trump administration, Federal Reserve policymakers have a high probability of maintaining interest rates in January. Trump has promised significant tax cuts for U.S. businesses, imposing or significantly increasing tariffs on imported goods, and deporting millions of undocumented immigrants, prompting economists to warn that these plans could lead to a sharp increase in U.S. inflation rates. Torsten Slok, Chief Economist at Apollo Global Management Inc., warned on Tuesday that people are becoming increasingly concerned about how the U.S. will manage its escalating debt and rising inflation expectations under the imposition of tariffs, predicting a 40% likelihood that the Fed will resume rate hikes in 2025. Expectations for rate cuts are cooling down The Fed lowered the benchmark overnight rate by 25 basis points to the 4.25%-4.50% range at its December monetary policy meeting. However, in the "dot plot" released in December, Fed officials generally projected only two rate cuts this year, compared to four when they launched the easing cycle in September. During the 2022-2023 period, the Fed raised its benchmark policy rate by 5.25 percentage points to curb the most intense inflation rates in decades. While layoff numbers remain historically low, recent data shows that corporate hiring activities have slowed down, leading to long-term unemployment for some laid-off workers. Reports show that in the week ending December 28, the number of people receiving continued unemployment benefits increased by 33,000 after seasonal adjustment to 1.867 million, the latest indicator of cooling in hiring activities. Some of the reasons for the increase in the so-called continued claims for unemployment benefits include difficulties in removing seasonal fluctuations from the data. With the median duration of unemployment in November close to a 3-year high, economists hope for improvements when the U.S. government releases the highly anticipated December employment report on Friday. A Reuters survey shows that non-farm payrolls in December may have increased by 160,000, as disruptions caused by hurricanes and a collective strike at Boeing Company plants have ended, providing a significant boost to the job market, while the negative employment impact from another aerospace company is gradually fading. On Tuesday, spurred by strong job vacancy data and service sector PMI data, the 10-year U.S. Treasury bond yield, known as the "anchor of global asset pricing," hit an eight-month high. The betting game on the direction of Fed rates on Wall Street seems to have shifted from expectations of rate cuts in 2025 to whether there will be any rate cuts at all. CME FedWatch Tool shows that interest rate futures traders expect cumulative rate cuts of about 30 basis points this year, meaning traders are generally betting that the Fed's rate cuts this year will not exceed 25 basis points, with the first rate cut expected in July; about one-third of traders are betting that the Fed will choose not to cut rates at all in 2025. Former senior economist in the Obama administration and current head of the APOLLO Group's Economic Research Department, Torsten Slock, warned on Tuesday that people are increasingly concerned about how the U.S. will manage its escalating debt and rising inflation expectations under the imposition of tariffs. This economist also predicts a 40% chance that the Fed will resume its rate hike policy in 2025.Professor Jason Furman of Harvard University believes that if the US labor market remains healthy, the Federal Reserve may only cut interest rates once this year. He also pointed out that the Federal Reserve has entered a new stage where a "compelling reason" is needed to justify a rate cut."Hola, cmo ests?"