Risk assets have been underperforming as investment banks reassess their Federal Reserve rate cut expectations following Friday’s stronger-than-expected U.S. jobs report.
Bitcoin (BTC) opened the week with a dip, falling below $93,000 during European trading hours, marking a 1.6% drop on the day, according to CoinDesk data. The cryptocurrency appeared to be testing its support level near $92,000, a key floor that has held since late November.
The broader market also experienced losses, with the CoinDesk 20 Index down over 3%. Major altcoins such as XRP, ADA, and DOGE saw even steeper declines.
Traditional markets also showed weakness, with S&P 500 futures trading 0.3% lower, reflecting a continuation of Friday’s 1.5% drop that saw the index fall to its lowest point since early November. The U.S. dollar index (DXY) approached 110, its highest level since late 2022, bolstered by rising Treasury yields.
Friday’s data revealed that U.S. nonfarm payrolls rose by 256,000 in December, far exceeding the expected 160,000 and the prior month’s revised figure of 212,000. The unemployment rate fell to 4.1%, and while average hourly earnings came in slightly below expectations at 0.3% month-over-month and 3.9% year-over-year, the report fueled concerns about inflation.
Goldman Sachs responded by pushing out its forecast for the next Fed rate cut to June, compared to its previous estimate of March. The investment bank now anticipates just two rate cuts in 2025 (in June and December), and one more in June 2026. Goldman noted that while December’s Federal Open Market Committee (FOMC) decision signaled a shift towards inflation risk, the recent jobs report indicated that the case for cutting rates to support the labor market has diminished.
The Fed’s rate-cutting cycle began in September, when the central bank reduced the benchmark borrowing cost by 50 basis points, followed by quarter-point cuts in subsequent months. In December, the Fed paused its rate cuts, signaling fewer reductions for 2025. Bitcoin has surged more than 50% since the first rate cut, reaching record highs above $108,000 at one point.
While Goldman Sachs and JPMorgan still expect rate cuts, Bank of America (BofA) is more cautious, suggesting the Fed may extend its pause. BofA analysts warned that the risks are now tilted towards a rate hike or renewed tightening. The U.S. 10-year Treasury yield has surged by 100 basis points since September’s rate cut, reflecting the growing market concerns about inflation and interest rate expectations.
ING also echoed the concerns about the Fed’s future actions, noting that the market is right to consider the possibility of an extended pause, especially in light of recent economic data. The bank highlighted that this view could be reinforced if the upcoming core inflation data shows a sustained rise.
The December Consumer Price Index (CPI) report is scheduled for release on January 15, and market observers are concerned that base effects could drive both the headline CPI and core CPI higher, fueling the hawkish narrative regarding the Fed’s policy stance.
