US Labor Market Data Creates Headwinds for the Treasury Market as Signs of Inflation Pressures Persist

There are increasing signs that the hawkish policies of central banks are restraining consumer spending and investments to the extent that inflation in the United States and globally is maintaining a steady downward trajectory. However, the Federal Reserve and the Bank of England are not in a hurry to validate market expectations that 2024 will be a year of aggressive interest rate cuts. Moreover, the Fed still leaves the question of additional rate hikes open, although markets assess the probability of such an outcome as practically zero:Both central banks will hold meetings this week, where they will try to cautiously outline the contours of monetary policy for the next year.The U.S. Federal Reserve is expected to keep the rate unchanged in the range of 5.25-5.5%. Indicators of economic activity, labor market data, and various inflation metrics indicate that high interest rates put brakes on US expansion and thus restrain demand-driven inflation. This narrative is reflected in both market expectations and recent comments from Fed officials. However, the market has gone further and started factoring in aggressive rate cuts in 2024, and in this regard, it will likely encounter serious resistance from the central bank at the upcoming meeting. It should be noted that bond yields have significantly retreated in the past few weeks, and the central bank is likely to be concerned that this easing of credit conditions in the market offsets the impact of tightening monetary policy. This, in turn, reduces the likelihood that the economy will require aggressive rate cuts in 2024.The central bank is likely to soften its position, but it will do so not at the upcoming meeting but in the first quarter of 2024. The U.S. economy is showing fairly good results in the face of high rates, and the labor market continues to demonstrate resilience potential (as shown in the latest NFP report), so the Fed should have very little reason now to indicate that the market's dovish expectations for 2024 are largely justified.The NFP report for November, published on Friday, surprised on the upside, albeit slightly. Employment in the U.S. increased by 199K, with a forecast of 180K, and the unemployment rate fell to 3.7%, although it was expected to remain unchanged at 3.9%. Wage growth unexpectedly accelerated to 0.4%, with an expected reading of 0.3%. Wage growth acceleration is one of the signs of increasing inflation pressure, although it is premature to draw conclusions from the dynamics of one month.In addition to the unemployment report, the University of Michigan's Consumer Optimism Index also exceeded expectations. The index rose from 61.3 to 69 points, with a more modest expectation of 62 points.A slight surprise in the data, indicating that the economy retains the potential for expansion under relatively tough credit conditions, led to an increase in bond yields at both the short and long ends of the yield curve. Since the release of statistics on Friday, the 10-year yield has added 7 basis points, and the 2-year yield has bounced back more strongly – by 11 basis points:The data allowed the dollar to gain additional space, especially against European currencies – the dollar index rose to 104 points. Gold quotes fell below $2000 per troy ounce, feeling the pressure from rising rates in the U.S. Risk assets, especially the U.S. stock market, maintain balance near local highs, as the combination of prospects for growth in the U.S. economy and modest growth in bond interest rates remains optimal for yield hunting.