Treasury Yields Hit 14-Month Highs as Hot Jobs Data Shifts Fed Expectations

Have Markets Priced Out Fed Rate Cuts?

Current market activity suggests traders believe the Federal Reserve’s rate-cutting cycle may be over. A blowout U.S. jobs report and surging bond yields are reshaping expectations, triggering significant shifts across equities, Treasurys, currencies, and commodities.

What Sparked the Shift?

December’s nonfarm payrolls rose by 256,000, far exceeding forecasts of 155,000, while unemployment ticked down to 4.1%. This robust labor market data undermines hopes for imminent rate cuts, as inflationary pressures remain a concern for Fed policymakers. Fed funds futures now price in less than a 3% chance of a rate cut this month, reflecting expectations for tighter monetary conditions.

Treasury yields surged on the news, with the 10-year yield reaching 4.794%, a 14-month high, and the 2-year yield climbing to 4.415%. Elevated yields underscore the market’s reassessment of the Fed’s path, signaling reduced appetite for risk assets like equities.

How Are Stocks and Currencies Reacting?

U.S. equity indices closed last week sharply lower, and futures pointed to further losses on Monday. The S&P 500 and Nasdaq Composite have seen two consecutive weekly declines, with tech stocks particularly vulnerable to rising yields. European and Asian markets followed suit, with major indices losing ground in anticipation of reduced global liquidity.

In the currency markets, the dollar surged to a two-year high, pressuring global peers. The euro slid to $1.0275, its weakest since late 2022, while the British pound fell to a 14-month low. Traders scaled back bets on rate cuts, further amplifying the dollar’s strength, which weighed heavily on commodities like gold and silver.

What Does This Mean for Commodities?

Gold and silver prices have struggled under the weight of a stronger dollar and higher yields, which diminish their appeal as inflation hedges. However, oil prices defied the trend, rallying to four-month highs amid tightening Russian supply concerns. These developments may add another inflationary layer to an already volatile market.

Is the Fed Pivot Off the Table?

With inflation risks elevated and the labor market resilient, the Federal Reserve appears increasingly unlikely to cut rates in 2025. Fed officials, including New York Fed President John Williams, will provide critical updates this week. Additionally, Wednesday’s consumer price index (CPI) report looms large—any upside surprise in core inflation could solidify the “higher for longer” rate narrative.

Traders should prepare for continued volatility as higher yields recalibrate valuations across asset classes. A cautious approach may be warranted, with particular attention to inflation-sensitive data and corporate earnings results this week.

More Information in our Economic Calendar.