The US Employment Cost Index (ECI) rose 0.7% in the fourth quarter. Forecasts were 0.8%.
The result was 0.1 percentage points below the forecast. This points to slower growth in employment costs than expected for the quarter.
Weaker Wage Growth Signals Earlier Fed Pivot
The fourth-quarter ECI shows weaker wage growth, which we see as a meaningful dovish signal. It suggests that a key driver of inflation is slowing faster than expected. We interpret this as raising the odds of an earlier-than-expected policy pivot by the Federal Reserve.
This ECI reading is not isolated. It supports the trend seen in the January CPI report, where core inflation kept moving down toward 3.1%. In response, market pricing has shifted. CME rate futures now imply more than a 70% chance of a rate cut by the June 2026 meeting—up notably from a few weeks ago.
For traders in interest rate derivatives, this backdrop favors positioning for lower yields. We should consider long positions in SOFR futures and Treasury note futures to benefit from the repricing of the rate curve. Near term, the path of least resistance for yields now looks lower.
In equities, the chance of lower rates is supportive, especially for growth and tech. We should consider buying call options or using bullish call spreads on indices such as the Nasdaq 100 and S&P 500. This data lowers the “higher for longer” risk that has weighed on equity valuations.
Positioning For Lower Volatility Regime
This outlook also suggests volatility could fall as the Fed’s path becomes clearer. The VIX, which recently moved down toward 13, may drop further if the disinflation story continues. We could consider strategies that benefit from lower volatility, such as selling premium via short straddles on less volatile names.
A useful comparison is the market reaction in late 2025, when early signs of easing inflation triggered a strong rally in both bonds and stocks. That period showed how quickly markets can reprice when a more accommodative central bank comes into view. Today’s setup feels similar, which argues for acting before the consensus fully shifts.
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