Weak ADP Figures Add to Rate Cut Bets

STOCK INDEX FUTURES

The indexes reversed course to head lower following the release of sour ADP private payroll figures, which fell well below forecasts. Private payrolls dropped by 32,000 in November, below expectations of a 10,000 gain. ADP said the decline was driven by a sharp pullback from small businesses, unsurprising given that tariffs have dented hiring plans across the economy, while the shutdown clouded business outlook and investment. Tech is being weighed down further by a drop in Microsoft shares after a report said the company would be lowering its AI software sales quotas.

ISM services data out later in the morning will be the next catalyst for markets. Forecasts are expecting a reading of 55.0 for November, which would be a slight uptick from October’s 54.8. Elsewhere, attention will center around Friday’s September PCE report.

CURRENCY FUTURES

US DOLLAR: The USD index is sharply lower following the weak ADP private payroll data, which led markets to further up bets of a December rate cut. The data aligned with dovish calls from key FOMC members, including New York Fed President Williams and Governor Waller, to address a slowing labor market. Meanwhile, inflation edged higher in the eurozone, while higher wages in Japan drove BoJ officials to signal an incoming rate hike, supporting major foreign currencies, further weighing on the dollar. Looking to 2026, division among FOMC members is likely to provide headwinds to the path of future easing as inflationary pressures in the economy remain present, especially in the services sector. There is a large amount of labor data due before the January FOMC meeting, which will likely sway opinion at the Fed as data collection efforts resume to normalcy.

EURO: The euro is strongly higher against the dollar following a positive revision the HCOB eurozone services PMI, which showed that private sector activity in the services sector expanded for the six-straight month and marked the fastest pace of growth since May of 2023. The index was revised to 53.6 in November from an earlier reading of 53.1 and above October’s 53.0 thanks to positive revisions to Germany, Spain, France, and Italy among others. Demand conditions improved for the fourth straight month and at the quickest rate in a year and a half, while employment in the sector continued to rise although the rate of job creation eased from October’s 16-month high. The prices index ticked up slightly; however, input price inflation remained near 12 month lows, while output charges rose at the softest pace in almost five year. The reading reflects what has been a strong recovery in the services sector for the eurozone as a whole, as activity has expanded sharply over the last three months. Paired with a rise in consumer prices, especially as the eurozone faces services sector inflation that remains well above target at 3.5%, the data supports the view that the European Central Bank will continue to stand pat on rates for the time being. Diverging policy signals between the Fed and the ECB are likely to provide the euro with strong support against the dollar, barring any shocks like a surprise rate hold from the Fed. Looking ahead to Friday, final third-quarter GDP data and unemployment figures for the eurozone will be released alongside industrial production figures from France and Spain.

BRITISH POUND: The pound is sharply higher against the dollar as UK services PMI was revised higher to 51.3 in November from an earlier estimate of 50.5. The figures remained below October’s reading of 52.3 as a slowdown in business activity growth and weakening demand conditions impacted businesses. For the private sector as a whole (composite reading) growth was revised slightly higher but remained below October’s reading as softening demand conditions led employers to cut employment, while businesses reported declined new orders, leading to soured expectations of future conditions. Additionally, input costs rose in November, while output prices fell as a competitive price landscape forced companies to keep prices low, hurting bottom lines. The pound has caught some support from expectations that stronger growth, which as been outpacing previous forecasts from the OECD, could keep pressure on inflation and force the Bank of England to reduce the overall amount of easing in 2026. Money markets show a 90% chance of a cut from the BoE, which would lower the base rate to 3.75%.

JAPANESE YEN: The yen is higher as increased expectations that the Bank of Japan will hike rates at its next meeting have offered the yen support in what been choppy trading over the last several days. Governor Ueda said the bank will weigh the “pros and cons” of raising rates at its next meeting later in December. December’s policy decision will likely be guided by further signals on wage negotiations, known as Shunto, as Ueda has said he would like to see more clarity regarding the negotiations. Increases in wage growth will help support underlying consumer demand and, in turn, support stable inflationary pressures. Early signs from the negotiations point to a solid round of pay hikes in the country, although negotiations should continue to be monitored for signals on how the BoJ will move in December. Markets now price in roughly a 90% chance of a hike in December. Tokyo core CPI figures came in hotter than expected last week, helping firm the case for a rate hike from the Bank of Japan. Prices rose 2.8% on the year in Tokyo, while the unemployment rate remained steady at 2.6%. Despite the expectations that the central bank will raise rates, concerns regarding Prime Minister Takaichi expansive fiscal policy stance still linger and could see the yen drop after some short-term strength. Markets are also expecting intervention from the government if the yen’s slide continues past the 160 level.

AUSTRALIAN DOLLAR: The Aussie hit a three-week high on Wednesday despite third-quarter GDP figures falling short of forecasts of 0.7% growth vs. a reading of 0.4%.  Household consumption slowed sharply (0.5% vs 0.9% in Q2), as discretionary spending cooled. Government spending growth was little changed, while a drop in net trade weighed on the reading, as export growth (1.0% vs 2.3%) rose less than import growth (1.5% vs 2.3%). On the bright side, private investment surged, adding 0.5% to the overall figure due to stronger machinery and equipment spending. Public investment also rebounded (3.0% vs. -3.5%). Annually, GDP grew 2.1%, slightly below forecasts of 2.2% and following a 2.0% rise in the second quarter. Despite the growth missing forecasts, inflationary signals are still present in the data and the reading is strong enough to suggest that the economy does not need any stimulus to help the economy. The Reserve Bank of Australia meets next week and is expected to keep rates steady and warn about inflation risks. Markets have priced out almost any chance of a further easing and suggest that when rates move, they will move upwards.

INTEREST RATE MARKET FUTURES

Yields are lower across the curve as data from the ADP unexpectedly reflected a 32,000 drop in private payrolls in November, the third drop in four months, and one of the lowest readings since 2023. The data reflects calls from several FOMC members that interest rates should come down in order to support the labor market. Also weighing on yields are expectations that Kevin Hasset will become the next head of the Fed when Powell’s term is over. At a White House event on Tuesday, President Trump dropped a major hint about the Fed chair role saying that a “potential” future chairman of the Fed was in the room, while Hassett stood close by. Prediction markets are implying over an 80% chance that Hassett will be nominated as the next Fed Chair, while Fed Funds futures are showing just under a 90% chance of a December cut. Expectations of further easing and the weak ADP figures alongside a poor manufacturing PMI reading earlier in the week offer support for bond prices in the near term.

Regarding the December meeting, it is likely that the FOMC will see Waller, Williams, Miran, and Bowman all vote for a cut, leaving eight other members’ decisions up in the air. Powell, Cook, and Jefferson have seemingly unknown stances, while Collins, Schmid, Goolsbee, Musalem, and Barr have all offered cautious comments in recent weeks. Given that Williams is a key ally to Powell, that could sway the Chair to vote for a rate cut and bring some other members with him as well. Today’s ADP data could be enough to help sway some of the members into voting for a December cut.

The spread between the two- and 10-year yields is unchanged at 57.80 bps, while the two-year yield, which reflects short-term interest rate expectations, dropped to 3.481%.

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