Initial Claims Hit Three-Year Low

STOCK INDEX FUTURES

The indexes are higher after dropping sharply following the release of weekly initial claims data, which showed jobless claims came in well below expectations of 219,000 at 191,000. The ISM Services PMI edged up to 52.6 in November from 52.4 in October, pointing to the strongest growth in the services sector in nine months and above forecasts of 52.1. Expansion in both business activity (54.5 vs. 54.3) and new orders (52.9 vs. 56.2), and the highest backlog of orders since February (49.1 vs. 40.8) are positive developments that show signs of an emerging recovery for the services sector are starting to appear. However, employment remained in contraction (48.9 vs. 48.2) although at a slower pace than before, while businesses noted that tariffs and the government shutdown continue to impact both demand and costs.

The indexes ultimately finished higher on choppy trading on Wednesday following the releases of ADP figures and the ISM data. Financials and defensive sectors rose strongly amid a repositioning after ADP’s surprise 32,000 decline in private payrolls pushed Fed cut odds higher. However, it should be noted that ADP’s data has often diverged from and is not strongly correlated with official data. As for further clues on policy, markets will await Friday’s September PCE report.

CURRENCY FUTURES

US DOLLAR: The USD index edged higher following the release of weekly initial claims data, which showed that jobless claims dropped to a three-year low. The dollar was under pressure on Wednesday 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 several FOMC members to address a slowing labor market. Meanwhile, strong data out of the eurozone and increased expectations that the Bank of Japan will raise interest rates supported 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 held steady after hitting its highest level since mid-October on Wednesday. Positive revisions to PMI data showed that business activity expanded at its fastest pace of growth in over two years. The HCOB eurozone services PMI index was revised to 53.6 in November from an earlier reading of 53.1 and above October’s 53.0. 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. Input price inflation remained near 12-month lows, while output charges rose at the softest pace in almost five years. The reading reflects what has been a strong recovery in the services sector for the eurozone as a whole, as activity has expanded robustly over the last three months. Paired with a slight 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. Markets are pricing in only a 25% chance of any easing next year.

BRITISH POUND: The pound edged higher on Thursday after rising over 1% in the prior session after better-than-expected revisions to PMI data and a weakening dollar led the sterling higher. 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 also got tailwinds from expectations that stronger growth, which has 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 hit a two-and-a-half-week high overnight as expectations that the Bank of Japan will raise interest rates this month further lifted the currency. A Reuters report out early Thursday cited three government officials who said that the BoJ will raise interest rates without any objections from the current administration. Reinforcing this view are comments from Finance Minister Katayama, who said on Tuesday that she saw no difference between the government and BoJ on their assessments of the economy. Looking past December, it remains uncertain as to the extent of tightening the economy could see out of the central bank. It is likely that further tightening could face strong resistance from the administration as well as from members of the BoJ. In an address to parliament today, Governor Ueda said there was uncertainty on how far the bank should hike rates due to the difficulty of estimating what would constitute a neutral rate. Shunto wage negotiations should continue to be scrutinized for a final outlook on December’s interest decision, as a strong increase in wages will help underlying consumer demand and support stable inflationary pressures. Conditions that the BoJ said would need to be met as a precursor to moving rates higher. Looking ahead, market attention will shift to how far policy direction will go in 2026. Given earlier resistance from the Taikaichi administration and current economic conditions, the path to further tightening of rates is likely to face strong headwinds.

AUSTRALIAN DOLLAR: The Aussie extended its rally as domestic data showed that household spending showed a 1.3% jump in October, the biggest increase since early 2024 and a hot start to the current quarter. This comes as yesterday’s GDP data revealed a silver lining in strong domestic demand, which has been supported by housing construction, government and consumer spending, and business investment. Third-quarter private-sector demand rose by 1.1% to be up 3.1% over the past year, which, excluding the years of the pandemic, was the largest quarterly gain since 2017. Residential investment increased by 2.0% in the quarter to be up by 6.5% from a year ago, while business investment increased by about 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, the inflationary signals present in the data could be 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 higher across the board as the weekly claims data came in well below expectations, and hitting its lowest level since September 2022. Despite this, markets are still pricing just under a 90% chance of a Fed rate cut next week. Wednesday’s ADP data reported a 32,000 decline in private payrolls last month. However, precedent has shown that official data often diverges from ADP’s reading, so too much weight should not be put on it. Regardless, the lack of official data has offered markets very few other places to look for clues on the labor market. Challenger job cuts data out earlier this morning showed US employers announced 71,321 job cuts in November, the highest for the month since 2022, compared to 57,727 a year earlier. However, layoffs fell from 153,074 in October although they are still at elevated levels compared to last year.

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.

The spread between the two- and 10-year yields is unchanged at 56.90 bps, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.514%.

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