How have U.S. employment data impacted Federal Reserve interest rate expectations?

US interest rate expectations have undergone significant shifts following the release of employment data for November, which showed an increase in the unemployment rate to 4.2%, raising caution within the Federal Reserve regarding the conditions of the US labor market.

The US economy managed to add 227,000 new jobs, surpassing expectations that pointed to 200,000 jobs. This followed a revision of the previous data for October, which indicated an addition of 36,000 jobs after revisions were made.

On the other hand, the data revealed an increase in the unemployment rate to 4.2%, a figure that aligns with market expectations but is higher than the previous reading that remained at 4.1% in October. This development reflects the challenges facing the US labor market in maintaining a balance between supply and demand.

Regarding wage rates, the average hourly wage recorded an increase of 0.4% in October, exceeding expectations that anticipated a growth of 0.3%. Year-on-year, wages rose by 4.0%, which is higher than expectations that indicated a growth of around 3.9%, while the previous reading remained at 4%.

Following the release of the data, US interest rate expectations experienced major changes, with the FedWatch tool showing an increase in the expectations for a rate cut of 25 basis points, rising to about 89.3%. In contrast, the expectations for keeping rates unchanged fell to around 10.7%.

This indicates that markets are expecting a potential rate cut during the upcoming Federal Reserve meeting in December, reflecting the anticipated shifts in monetary policies to address economic challenges.