New York CNN Business  — 

Wall Street is betting that a looming slowdown in economic growth will prevent the Federal Reserve from raising interest rates this year.

That’s a sharp reversal from just a few months ago when markets were bracing for multiple rate hikes as the American economy cruised ahead. It also contradicts the Fed’s signals of two rate hikes this year.

But investors now think there’s a greater chance that the Fed cuts rates to juice the economy than lowers them – despite blockbuster economic numbers released on Friday. The December jobs report showed that US payrolls surged by 312,000 jobs and wage growth accelerated to a very healthy level of 3.3%.

“It was a shockingly good number, across-the-board,” said Nicholas Colas, co-founder of DataTrek Research. “But the market will look at it as one more sign that last year was the top. How are you going to do better than that? You probably won’t.”

It’s more evidence of how investors and economists (especially ones at the Fed) seem to be speaking different languages.

44% chance of rate cut

The odds of at least one rate hike by January 2020 stood at nearly 70% a month ago, according to the CME FedWatch Tool, which measures probabilities based on futures contracts.

But fears of a severe slowdown – or even recession – caused investors to rethink things. The odds of a rate cut over the next year plummeted to zero on Thursday, a day when the Dow plunged 660 points.

The robust December jobs report didn’t move the needle much. The odds of at least one rate hike by January 2020 ticked up to 1.8% on Friday, according to CME.

“There is no way the Fed could raise rates under current circumstances,” said Brian Rose, senior Americas economist at UBS Wealth Management.

Investors in the futures market see a 44% chance of the Fed coming to the rescue with a rate cut over that time frame. That’s down from 59.3% on Thursday, but well above the 5.2% chance a month ago.

In other words, Wall Street thinks the Fed is done – at least for now.

“It’s absolutely contrary to the Fed’s guidance,” said Colas. He noted that the two-year Treasury yield, which is very sensitive to rate hikes, is barely trading above the Fed’s target.

Powell promises patience

The central bank indicated at last month’s meeting that the economy likely warranted two rate increases in 2019.

Jerome Powell, the chairman of the Federal Reserve, struck a more cautious stance on Friday about future moves.

While Powell called the December jobs report “very strong,” he stressed that the Fed is “always prepared” to shift the stance of policy if needed.

“We will be patient as we watch to see how the economy evolves,” Powell said at the annual American Economics Association conference. His comments helped lift the Dow 700 points on Friday.

Mohamed El-Erian, chief economic advisor at Allianz, said it’s far too early for the Fed to take a victory lap because the balance of risks remain tilted to the downside.

“They’ll keep their options wide open. But they won’t say, ‘I told you so,’” El-Erian told CNN International on Friday.

And just because the futures market is pricing in little chance of a rate hike, doesn’t mean it’s right. Those bets would change significantly if the US economy proves more resilient than investors think.

“Today’s jobs report shows that the picture can change fairly substantially in a short period of time,” said Gus Faucher, chief economist at PNC.

Faucher said the market might be “underpricing” the chance that continued solid growth will lead the Fed to raise rates in the middle of the year.

Trouble ahead?

One reason why the jobs report hasn’t shifted Wall Street’s thinking on rates much is that hiring is often viewed as a coincidental to slightly lagging indicator.

Markets are looking ahead – and the future doesn’t look as rosy.

For instance, the ISM manufacturing index, a leading indicator, showed that US factory activity slowed in December at the fastest pace since the Great Recession. While the closely-watched barometer remains firmly in expansionary territory, it also declined to a two-year low due to pressure from China’s slowdown and the trade war.

The bleak ISM report added to other worrying signs. Almost half of US CFOs expect a 2019 recession in the United States. China’s vast manufacturing sector tumbled into contraction last month. And Apple blamed weakness in China and trade tensions for a big sales miss.

“You’re seeing a synchronized slowdown in the two most important economies in the world,” said Colas.