The US Employment Situation report for December revealed unexpected outcomes, showing that job growth fell short of predictions. Non-farm payrolls increased by only 50,000, below the Bloomberg median estimate of 70,000. The previous month’s revisions noted a further reduction of 76,000 jobs. Despite lower expectations, the unemployment rate decreased to 4.4% from November’s 4.5%, with an average employment growth of 49,000 per month in 2025 compared to 2024’s 168,000.
Job Increases And Losses
Job increases came from both private and public sectors, primarily in healthcare, leisure, and financial activities. Conversely, manufacturing, construction, retail trade, warehousing & transportation, and professional services experienced job losses. Wage growth was slightly higher than anticipated at 0.3% on a monthly basis and 3.8% annually, compared to November’s 0.2% and 3.6%, respectively.
Analysts maintain an outlook favouring future rate cuts but not in the immediate term. There is an anticipated pause in early 2026 to align with Jerome Powell’s departure as Chair in May, with two anticipated rate reductions in the second and third quarters.
With the December 2025 jobs report coming in much softer than anticipated, we see clear signs of a cooling US economy. The report showed a meager 50,000 jobs added and significant downward revisions to prior months, reinforcing the view that the Federal Reserve’s next move will be a rate cut. However, slightly sticky wage growth suggests they are not in a rush to act immediately.
For those trading interest rate futures, this scenario points to a pause from the Fed in the near term, followed by cuts later in the year. The CME FedWatch Tool now shows the market is pricing in a greater than 65% probability of a rate cut by the June 2026 meeting, up from around 40% before the jobs data. This suggests positioning for a steeper yield curve by using options on SOFR futures that bet on lower rates in the second half of the year.
Increased Economic Uncertainty And Market Volatility
The increased economic uncertainty should be reflected in equity market volatility. We have seen the VIX, a key measure of expected market volatility, climb from the low 14s in late 2025 to near 17 following last week’s report. Traders should consider buying protective put options on major indices like the S&P 500 or using strategies like collars to guard against a potential downturn in the coming weeks.
This pattern of a weakening labor market preceding a change in Fed policy is something we have witnessed before. Looking back at late 2018, similar signs of economic slowing emerged, which ultimately led the Fed to halt its rate-hiking cycle and begin cutting rates in 2019. The current situation feels familiar, suggesting that market weakness could precede the official policy shift.
The jobs data also revealed a clear split between sectors, with healthcare gaining jobs while manufacturing and construction shed them. This divergence supports using derivatives on sector-specific ETFs. One could consider put options on an industrial ETF like XLI while remaining more neutral or even cautiously bullish on a healthcare fund like XLV.
Finally, the expectation of future US rate cuts puts downward pressure on the US dollar. As other central banks may not be as quick to ease policy, this creates opportunities in the currency markets. We believe long call options on pairs like the EUR/USD or GBP/USD offer a compelling way to position for dollar weakness into the second quarter.
