Strong Data Dampens Rate Cut Expectations, Lifts Dollar And Spurs Treasury Yields: Thursday’s Economic Digest

The dollar and U.S. Treasury yields have reached highs not seen in over a month, driven by the ongoing resilience of the American economy, as evidenced by the release of generally better-than-expected data.

The U.S. Dollar Index (DXY), which measures the greenback’s performance against a basket of major currencies, edged slightly higher to approach 103.52 on Thursday. The yield on a 10-year Treasury Note, whose performance is tracked by the U.S. Treasury Note ETF (NYSE:UTEN), briefly reached 4.13%, hitting its highest levels since Dec. 13.

Market-implied probabilities of a rate cut by the Federal Reserve in March hovered at around 55%, according to CME Group’s FedWatch Tool, equalling to 13 basis points priced in. Market rate cut expectations are slightly up from Wednesday’s 50%, but significantly lower than the 73% seen a week ago.

Here are the key economic data points moving the markets on Thursday:

Jobless Claims Fall More Than Expected

During the week ending Jan. 18, the number of Americans applying for unemployment benefits saw a substantial decrease of 16,000, reaching 187,000. This figure represents the lowest level since September 2022, and it significantly came below market expectations of 207,000, as per data reported by the Labor Department.

Furthermore, continuing claims experienced a decline of 26,000 in the previous week, falling to 1,806,000, marking the lowest point since September 2022. This trend suggests that individuals who are unemployed are encountering relatively fewer difficulties in securing new job opportunities.

Why It Matters: These lower-than-anticipated jobless claims shed light on the persistently tight labor market in the United States. This development has raised concerns that the Federal Reserve might consider maintaining its current high-interest rate stance into the second quarter, if necessary, in order to address inflationary pressures.

According to Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, a strong job market is positive for the stock market, dispelling the common belief that bad economic news is good for markets.

He noted that “the economy will continue to expand, and a recession will be averted this year as well,” adding that “pervasive pessimism and doubt about the stock market and the economy…