Commerzbank said the delayed US labour market report is likely to be the main driver of US interest rates and the US Dollar, after a strong reaction in US Treasuries to last week’s JOLTS data. It added that December’s payrolls print was weaker than expected.
The bank’s economists forecast a higher rise in payrolls in the latest report, while describing the broader trend as subdued. It said markets have shown high sensitivity to labour data.
Labor Data Drives Rates And Dollar
Commerzbank said a larger downside surprise would be needed to move the US front end lower in a lasting way. It said current Federal Reserve expectations are pricing chances for three rate cuts this year, and that yields across the curve are back near the lows from early January.
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Looking back to early 2025, we recall how the market was pricing in roughly three Federal Reserve cuts for that year. The labor market, however, proved more resilient than anticipated through the second and third quarters, consistently surprising to the upside. This strength ultimately led the Fed to deliver only a single 25-basis-point cut in December 2025, delaying the start of a more significant easing cycle.
The market’s sensitivity to employment data has therefore become even more acute as we navigate the start of 2026. After the latest January jobs report showed non-farm payrolls adding a slightly disappointing 175,000 but wage growth remaining firm at a 4.1% annual rate, uncertainty is high. This mixed data reinforces the Fed’s cautious stance, making any deviation in upcoming reports a major catalyst for front-end rates.
Positioning For Volatility And Curve Moves
For the coming weeks, we see value in strategies that benefit from a potential spike in interest rate volatility. Buying options like straddles on SOFR futures ahead of the next employment report could be an effective way to position for a sharp move. A larger-than-expected downside surprise in payrolls is necessary to sustainably pull forward rate cut expectations for the March and May 2026 meetings.
The yield curve has flattened notably since the end of last year, as the market digests the Fed’s patient approach. We believe this presents an opportunity to position for a potential re-steepening, which would occur if data forces the Fed to signal a faster pace of cuts. This view can be expressed through trades that go long front-end government bond futures while shorting longer-dated ones.
