US rate futures lift odds of January cut after unemployment rises in November

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 16 (Reuters) - U.S. rate futures on Tuesday raised the probability of the Federal Reserve cutting interest rates at the next policy meeting in January after data showed U.S. unemployment rose last month.

Futures on the federal funds rate, which measure the cost of unsecured overnight loans between banks, priced in a 31% chance the Fed will reduce rates next month immediately after the nonfarm payrolls report, compared with 22% just before, according to LSEG estimates. It was last at 27%, while the odds for a pause were at 73%.

U.S. rate futures, however, still expected two cuts of 25 basis points (bps) each in 2026 after the data, pricing in 57 bps of easing next year.

The first likely rate reduction next year was seen in June, where the probability was at 83%.

Tuesday's data showed that while U.S. job growth recovered in November after nonfarm payrolls declined in October because of government spending cuts, the unemployment rate increased to 4.6%, compared with 4.4% in September. The jobless rate is derived from household data, which was not collected in October due to the government shutdown.

Nonfarm payrolls increased by 64,000 jobs last month, according to the report from the Bureau of Labor Statistics, while the economy shed 105,000 jobs in October.

"The basic story was one of soft-ish stability. Employment remains flat-ish – which isn't great – but there is no sign that it is spiraling...in the way (the Fed) feared a few months ago," wrote Dario Perkins, managing director, global macro at TS Lombard, in a research note after the jobs data.

"The unemployment rate ticked up... which might worry officials more, although that was partly the result of higher participation. The employment/population ratio has been stable since the summer," he added.

Separately, U.S. retail sales came out unexpectedly flat for the month of October, even though consumer spending appears to have remained on a solid footing at the start of the fourth quarter. The data did not have a material impact on rate futures on Tuesday, but it added to the growing conviction that the economy is more stable than people initially thought and the Fed needs to be cautious in cutting interest rates.

The retail sales report was originally due in mid-November, but was delayed by the 43-day government closure.