USD: Mixed data fails to shift rate cut expectations – MUFG

In a recent report by MUFG, Derek Halpenny discusses the implications of the latest Non-Farm Payroll (NFP) data on the US dollar and interest rate expectations. Despite a weak labor market, the data did not significantly alter market perceptions regarding potential rate cuts in 2026. The report highlights the disconnect between labor market conditions and consumer spending, as well as the potential for future mixed employment data to influence rate cut convictions.

NFP data fails to shift market expectations

"A double-NFP data release always had the potential to fuel a spike in volatility and a shift in market pricing into year-end, but alas it was not to be with the data certainly indicating still weak labour market conditions, but just not weak enough to see global investors reconsider the current profile for rate cut expectations in 2026. A March rate cut remains around a 50-50 call following the data with the only top-tier data release remaining the CPI data for November, to be released tomorrow."

"The limited market shift in rates expectations was understandable given the very weak NFP print for October (-105k) was entirely down to the government job losses released to voluntary resignations earlier in the year that were realised in October. The 157k drop in government jobs in October masked the fact that there was still a reasonable 52k gain in private sector employment. Then in November the private sector jobs gain picked up to 69k."

"We suspect further mixed employment data like we got yesterday will ultimately open up greater conviction over a rate cut in March but that may only come once we have the CPI data released on Thursday. The consensus is for YoY CPI rate to remain at around 3.0% but over the coming months we expect to see signs of disinflation emerge with the tariff-related inflation pick up possibly mostly now through the data given certain import-sensitive sectors of CPI have already shown larger MoM increases."

"The lack of dollar selling could also reflect the fact that Kevin Hassett is no longer the definite pick for Fed Chair position and instead both Kevin Warsh and Christopher Waller are back in the running. Polymarket probabilities now have Hassett, Warsh and Waller closer to each other than before. Still, Hassett is again showing as being the favourite so the recent relief for the dollar may quickly fade."