Non-farm data is coming, how will the Federal Reserve's interest rate cut expectations affect the dollar and the stock market?

Mid-December US employment report is about to be released, and market expectations for this data are particularly high. According to public forecasts, this report will include both October non-farm payroll data and the full employment figures for November, with November’s performance being especially critical—traders generally expect an increase of 130,000 jobs, while October may show a decline of 10,000.

But behind the numbers lies an interesting tension. Citibank economists point out that this month-over-month rebound may not reflect a true improvement in the labor market but is more likely due to seasonal adjustments and technical factors. In other words, the market should be cautious of a “good-looking” data that masks a “mediocre” reality.

When will the Federal Reserve restart rate cuts? The market provides an answer

The latest Fed dot plot signals that only one rate cut is planned for 2026. However, traders’ views differ significantly—they are betting that the Fed will implement two rate cuts next year. According to the CME FedWatch Tool, the market’s next rate cut is expected in April 2026, with a 61% probability.

The logic behind this is clear: the Fed’s decisions are highly dependent on labor market performance. Fixed income strategist Kevin Flanagan offers a realistic constraint—current government operations are hindered, leading to increased complexity in data collection, which causes the market to focus on the next employment report scheduled for January 9, 2026.

How employment data influences the three major asset classes

The analysis is straightforward: if employment data exceeds expectations, the Fed is likely to prolong its pause, causing the US dollar to strengthen, while gold and stocks face pressure; conversely, the opposite is true. Morgan Stanley’s view is more direct—they expect the dollar to fall 5% in the first half of next year, implying that the current USD exchange rate still has room to weaken further, leaving room for a deeper rate cut cycle.

However, Citibank’s assessment is entirely different. They believe the US economy will continue to perform strongly, attracting international capital and providing solid support for the dollar. Citibank is therefore optimistic about the potential recovery of the dollar cycle in 2026, a view fundamentally rooted in confidence in the resilience of the US economy and its capital attractiveness.

Facing this market crossroads, investors need to look for clues in the December 16 employment report to judge how the balance of power among the dollar, US stocks, and gold will tilt.