Morning Update: Employment Surge Influences Interest Rate Predictions

• January payrolls of 140,000 nearly doubled expectations of 70,000, with unemployment unexpectedly declining to 4.3% despite rising labor force participation
• Interest rate futures now price only two Fed cuts in 2026 (down from earlier expectations), with the first cut not fully priced until July as labor market stabilization shifts focus to inflation
• Congressional Budget Office projects the 10-year deficit will be $1.4 trillion (6%) higher than January 2025 estimates, with debt-to-GDP ratio expected to exceed 106% by 2030, surpassing the 1946 peak

Market Summary: Employment Surge Influences Interest Rate Predictions

Key Developments

Employment Data: U.S. January payrolls surged to approximately 140,000 jobs (nearly double the 70,000 forecast), while unemployment unexpectedly dropped to 4.3% despite rising labor force participation. Average earnings growth also accelerated, signaling labor market stabilization into 2026.

Federal Reserve Implications: The robust jobs report has dampened rate cut expectations. Markets now price in only two rate cuts for 2025, with the first not fully anticipated until July. This represents a significant pullback from earlier dovish expectations. Fed Chair Jerome Powell's previous assessment of labor market stability appears validated, allowing the Fed to prioritize its inflation mandate, which remains "well above target."

Fiscal Concerns: The Congressional Budget Office projects the cumulative 10-year deficit will be $1.4 trillion (6%) higher than January 2025 estimates. The debt-to-GDP ratio is forecast to exceed its 1946 peak of 106% by 2030, explaining why U.S. Treasury borrowing costs remain elevated despite President Trump's calls for the world's lowest rates.

Market Reaction: Global stocks initially digested the news cautiously but recovered Wednesday. Thursday saw Wall Street futures rise and European stocks hit new records. China's offshore yuan surged to three-year highs ahead of Lunar New Year.

M&A Activity: U.S. asset manager Nuveen agreed to acquire UK's Schroders for £9.9 billion ($13.5 billion), marking one of Europe's largest fund management deals and ending the 222-year-old firm's independence. The deal reflects rotation into value stocks and relatively cheap UK markets.

Upcoming Catalysts: Friday's CPI report takes center stage for inflation trajectory assessment.