Labor Data Points to Softening Conditions

STOCK INDEX FUTURES

Stock index futures edged higher, with the S&P and Nasdaq leading gains while the Dow lagged. ADP private payroll figures came in below expectations, showing that private employers added 54,000 jobs in August, below expectations of 73,000. Leisure and hospitality and construction performed well despite a broader slowdown in hiring. The indexes fell sharply following the release of the data. Trade balance figures showed that the US trade surplus grew in July due to an increase in imports, although export figures grew as well. Weekly initial jobless claims came in above expectations with 237,000 new claims, a rise above last week’s 229,000 and above expectations of 230,000. The four- week MA rose to 231,000.

Attention now centers around Friday’s decisive nonfarm payrolls report for August, which essentially could determine the amount of easing from the Fed this year. If payrolls and revisions see weak growth, expectations that the Fed will cut multiple times are likely to rise. If job growth is steady, markets will continue to expect a rate cut in September; however the interest rate picture will remain fuzzy in the future.

Stock indexes were mixed Wednesday following the JOLTS data, which showed that hiring and layoffs were broadly steady in July although it showed signs of a cooling labor market. The rate of layoffs in the economy held steady at 1.1%, the same level as twelve months ago, while the rate of new job offers also held steady at 3.3%. The number of open jobs declined marginally, slipping to 7.2 million from 7.4 million in June. That pushed down the rate of job openings to 4.3%, from 4.4% a month earlier. The rate at which people quit jobs also held steady. Notably too, there were 0.99 job openings for every unemployed person, down from 1.05 in June and the first drop below the 1.00 threshold since April 2021 during the pandemic. The data suggests that the labor market is softening, but not one that has pumped the brakes too hard, with longer stretches of unemployment and fewer open roles for people who are out of work. However, the economy has held together well because companies have yet to conduct large-scale layoffs. The report does add to speculation that the Fed will cut rates in September. The tech sector got a boost yesterday after Google was spared in an antitrust lawsuit after a judge ruled that the tech giant does not need to sell its Chrome browser, allowing the company to continue paying Apple to use Google Search as a default in its devices.

ISM Services PMI figures are due at 9:00 a.m. CT along with S&P Global Services and Composite PMI figures for more clues on private sector activity in the services sector. These reports will follow Tuesday’s ISM Manufacturing PMI, which rose slightly to 48.7 in August but remained in contraction for the sixth consecutive month, signaling continued weakness in the sector. New orders rebounded to 51.4, suggesting some demand recovery, but production fell sharply to 47.8, and employment continued to decline. Shrinking inventories and backlogs point to softer demand, while input price inflation eased slightly to 63.7 but remains historically high. Tariffs were again cited as a drag, contributing to higher costs, supply chain issues, and reduced competitiveness.

CURRENCY FUTURES

The USD index is higher after getting off to a volatile start in the morning. The dollar fell following the release of ADP private payroll figures but pared back losses following the release of weekly claims and trade balance figures. The dollar fell sharply following the JOLTS jobs report, which added to expectations that the Fed will cut rates in September, given the data pointed to softening labor conditions. Fed funds futures priced in a 97% chance that the Fed will cut rates in September following the data, up from 92% before the data. Focus now shifts to tomorrow’s pivotal labor data, which will set the tone for the near-term rate outlook. Weaker-than-expected jobs data could weigh on the dollar and add to expectations about further rate cuts from the Fed.

Euro futures are lower, pressured by a stronger dollar. The euro rebounded from Tuesday’s losses yesterday as the global bond sell-off eased and after the dollar weakened on softer jobs data. S&P Global Composite PMI figures for August, which showed private sector activity in the eurozone expanded at a smaller pace than expected. Composite PMI figures posted an index reading of 51.0, just below expectations for a reading of 51.1, while services PMI figures also squeezed out growth, posting a reading of 50.5 vs. expectations of 50.7. Consumer prices rose 2.1% in August in the eurozone, up from 2.0% in July and adding to expectations that the European Central Bank will leave interest rates unchanged at its meeting next week. Core inflation was unchanged at 2.3%. In Germany, inflation rose in August, while inflation eased in France and was stable in Italy and Spain, per data posted last week. The European Union’s statistics agency Monday said the unemployment rate fell to 6.2% from 6.3% in June, matching a record low, as the number of workers without a job fell by 170,000. The data added to market expectations that the ECB will be comfortable leaving borrowing costs in place for the longer term. The recent strengthening of the euro, which is expected to continue into the future, has reduced the competitiveness of European goods on the global market. The stronger euro, along with newly imposed US tariffs, is likely to hurt growth for the trade bloc, especially for export-focused Germany, as its European neighbors will be unable to pick up the hit to demand from the American market.

British pound futures edged lower but steadied from yesterday’s losses in what has been its most volatile week in months as investors have grown increasingly worried over Britain’s fiscal situation, which has rattled bond markets there and across the globe. Long-dated government bonds in Britain hit their highest levels since 1998 earlier in the week as a result of the sell-off. Normally, the higher yields would support the pound. However, when those higher borrowing costs stem from concerns about confidence in long-term growth rather than inflation, the currency tends to weaken. Bank of England Governor Andrew Bailey on Wednesday suggested that interest rates in the country would fall, but that there was less certainty about the pace of cuts. Money markets are pricing in a rate cut from the BoE at its September meeting but are unsure about the prospect of further rate cuts afterwards. The UK’s challenging fiscal environment could open the door for more rate cuts this year if economic conditions worsen. Inflation rose to 3.8%, although many price pressures are expected to drop from the last reading. Finance Minister Rachel Reeves is expected to raise taxes in her autumn budget, due in late November, in order to remain on course for her fiscal targets, potentially adding to the challenge of boosting growth.

Japanese yen futures are lower. A 30-year Japanese government bond auction passed smoothly on Thursday, calming some market nerves after a sell-off earlier in the week saw long-term debt yields hit record highs. Prime Minister Shigeru Ishiba’s fate continues to weigh on the yen. Secretary-General Hiroshi Moriyama, a close aide to Prime Minister Shigeru Ishiba, said he intended to resign earlier in the week. This development follows Ishiba’s party’s defeat in the upper house election in July, which has resulted in calls for him to resign from his post. Further pressuring the yen were comments from Deputy Governor Ryozo Himino that offered a lack of a hawkish tone. Himino offered few hints on how soon the central bank could raise interest rates, cautioning that global economic uncertainty remains high. Bank of Japan Governor Kazuo Ueda reiterated Wednesday that the bank’s policy stance on rate hikes remains unchanged if growth and inflation progress as anticipated. Tokyo core CPI recorded a reading of 2.5% last week, above the Bank of Japan’s 2% target and down from a previous recording of 2.9%. Industrial production in the country declined 1.6% in July, below expectations of a 1.1% drop, while retail sales in the country shrank 1.6% during the same period as well, also falling below expectations. At the same time, the unemployment rate eased to 2.3% from 2.5% in June, pointing to continued labor market strength. The mixed data suggests that conditions for a rate hike from the BoJ are not yet in place.

Australian dollar futures are sharply lower. Trade balance figures showed Australia’s trade surplus grew to its highest level since early 2024, having benefited from a gain in resource exports. GDP figures showed the economy grew 0.6% during the second quarter. Annual growth came in at 1.8%, beating expectations of 1.6% growth. The data points to evidence of a recovery in the economy, although the figures remained sluggish in a general sense as investment in the country weakened. Domestic demand was the main driver of growth, led by household and government spending. Household spending grew 0.9% in Q2. The increase in household spending should be noted for the interest rate environment, as it could put pressure on prices and limit the number of future rate cuts from the Reserve Bank of Australia. Recent CPI data showed an uptick, reminding policymakers that caution is warranted. Money markets show just a 10% chance of a rate cut from the central bank this year, down from 20% before the release of GDP figures. Manufacturing activity surged to a near three-year high in August 2025, marking the eighth straight month of expansion. However, business inventories expanded at their slowest pace since the Q3 2024 contraction, signaling potential supply-side caution. In housing, private house approvals saw a modest rebound in July, but this was overshadowed by a sharp decline in total dwelling approvals, which missed forecasts and erased June’s strong gains.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as markets expect the Fed to cut rates at its September meeting following the release of labor data that is pointing to a softening labor market. Markets are pricing in a 97% chance that the Fed will cut rates at its September meeting. Focus will now shift to Friday’s nonfarm payroll data, which could determine the extent of interest rate cuts the economy will see from the Fed this year.

Treasurys recovered on Wednesday after the JOLTS report came out, as the data favored a rate cut and showed that employment conditions were largely stable but declined from the previous report. Layoffs held steady at 1.1%, hiring stayed at 3.3%, and job openings dipped slightly to 7.2 million from 7.4 million, suggesting a gradual cooling rather than a sharp downturn. Job seekers are facing tougher conditions; those already employed have largely been shielded from widespread layoffs. US economic activity and employment were largely unchanged in recent weeks, while prices rose modestly, according to the Fed’s Beige Book. The report highlighted ongoing uncertainty and the negative impact of tariffs, with mixed business sentiment across districts—factors that may be contributing to growing support among policymakers for potential rate cuts. Businesses report that consumer wallets are under pressure, as wage growth fails to keep pace with rising prices. This has led to weaker spending, prompting retailers and hospitality firms to offer more discounts, while auto companies are seeing increased demand for vehicle repairs over new purchases.

Tuesday’s global bond sell-off reflected renewed investor concerns over rising government debt and its potential impact on long-term yields. In the US, fiscal worries were compounded by a court ruling that deemed most of President Trump’s tariffs illegal—though they remain in effect until October 14 pending a possible Supreme Court appeal. Markets are now highly sensitive to upcoming labor data, which could be pivotal for interest rate expectations following a steady July PCE inflation report. Meanwhile, uncertainty surrounding Governor Lisa Cook’s potential removal has added volatility to Treasury yields, with fears that a more dovish Fed board could loosen policy too much, driving short-term yields lower and long-term yields higher amid rising inflation expectations.

The US Treasury market is also experiencing a unique supply/demand dynamic shift. Recent government debt auctions have shown a changing profile of who is purchasing government bonds, with demand from traditional investors like central banks and pension funds waning and unlikely to come back. Instead, short-term investors such as money market funds have picked up supply. The new mix of investors is likely to lead to a more volatile market for longer-dated debt, as short-term investors will be more price sensitive than traditional investors, like pension funds, who tended to hold onto their bond investments. Demand from pension funds has dwindled in recent years due to funds switching from defined-benefit schemes, which provide a guaranteed income at retirement, to defined-contribution schemes, which depend on investment performance. Defined-benefit schemes use government bonds, while defined-contribution schemes favor equities. These developments also come at a time when central banks are selling their holdings of government debt (quantitative easing), and governments are increasing spending, driving up bond issuance. This has resulted in investors demanding more term premium on longer-dated debt, while shorter-term debt has remained closer to current interest rate levels, steepening the yield curve. In response, governments have increased short-term debt issuance in order to avoid steeper borrowing costs, which has the potential to reduce liquidity in longer-dated bonds and make them more volatile.

The spread between the two- and 10-year yields fell to 58.5 bps from 62 bps on Wednesday.

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