U.S. rate futures increase December hike odds after stronger payrolls data
Stronger-than-expected U.S. hiring in May is prompting markets to reassess the Federal Reserve's policy path into year-end. Traders now assign a higher probability to a December rate increase while still expecting the Fed to leave rates unchanged at its June meeting.
Highlights
- LSEG estimates show U.S. interest rate futures now price in a 65% chance of a Fed rate hike in December, up from 48% pre-payroll report.
- U.S. nonfarm payrolls rose by 172,000 in May versus economist forecasts of 85,000 and an upwardly revised April gain of 179,000.
- Stronger-than-expected payrolls data signals U.S. economic resilience and reinforces market anticipation of prolonged Fed policy restrictiveness.
Payrolls shift market pricing
As reported by Reuters, U.S. interest rate futures on Friday lift the implied odds of a Federal Reserve rate increase by the December policy meeting after May nonfarm payrolls come in well above market expectations.LSEG estimates show the futures market now prices in a 65% chance of Fed tightening in December, up from 48% before the jobs report. For the June meeting, markets still expect the central bank to keep interest rates steady at 3.5% to 3.75%.
Implications for Fed expectations
U.S. nonfarm payrolls increase by 172,000 jobs last month after an upwardly revised gain of 179,000 in April. Economists polled by Reuters had forecast an increase of 85,000 jobs after a previously reported 115,000 rise in April.The stronger labor data suggests continued resilience in the U.S. economy, supporting expectations that the Fed could maintain a restrictive policy stance for longer if employment conditions remain firm.
Our earlier coverage of the May U.S. jobs report highlighted that nonfarm payrolls rose by 172,000—well above forecasts—while the unemployment rate held steady at 4.3%. We noted that this combination pointed to a resilient but cooling “slow-hire, slow-fire” labor market, leaving the Fed room to keep rates in the 3.50% to 3.75% range even as policy and geopolitical uncertainties remained in focus.
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