Rate Cut Bets Back On

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as odds of a Fed rate cut in December have bounced higher, but markets still remain split on what will happen given the divide inside the Fed and yesterday’s payroll data, which painted mixed signals on labor conditions. September’s nonfarm payrolls came in well above expectations at 119,000 new jobs, the biggest gain in five months, while August’s figure was revised from 22,000 to a net loss of 4,000.

Mixed Fed speak to start the day: NY Fed President Williams said another rate cut could be “near term,” which helped contribute to bets of a December cut. On the other hand, Boston Fed President Collins (voter, dovish), in an interview, said that the September jobs data were mixed and she was not surprised by the uptick in the unemployment rate in September. However, Collins said that with limited data, the economy continues to be resilient, though the jobs market has clearly softened. She sees the current mildly restrictive rates as appropriate as inflation remains elevated. She is “hesitant” to get too far ahead with rate cuts while inflation is still high and financial conditions are accommodative.

Notably, from the report: the labor force participation rate remained unchanged at 62.4%; long-term unemployment numbers remained unchanged; and the unemployment rate ticked up to 4.4% from 4.3% in August after starting the year at 4.1%. A healthy figure historically, but the rise over the course of the year, paired with what are higher-than-normal long-term unemployment figures is likely to catch eyes at the Fed.

The Fed’s October meeting minutes revealed that there is a growing contingent of policymakers who view it as appropriate to keep rates on hold for the remainder of the year, while “most” see further easing as likely. However, “several” of those in that contingent said that a December cut was not necessarily appropriate, while “several” also said a December cut “could well be” appropriate. The minutes reveal that there may not be majority support for a December rate cut, though most are looking towards cutting rates in the future towards a more neutral policy.

The spread between the two- and 10-year yields fell to 55.20 bps from 55.60 bps on Thursday, while the 2-year yield, which reflects interest rate expectations, fell to 3.505%.

STOCK INDEX FUTURES

The indexes are higher following a volatile day yesterday after Nvidia’s strong earnings revived confidence in the AI trade, but sentiment shifted later in the session. The Dow fell 0.84%, the S&P 500 dropped 1.56%, and the Nasdaq Composite slid 2.15%. Major tech names recorded sharp losses as concerns about an AI bubble continued, with Nvidia, AMD, Palantir, Micron Technology and Oracle declining between 3.2% and 10.9%. The major indexes are facing weekly losses across the board. The S&P and Nasdaq are on track for declines of over 2% and 3%, having ended Thursday at their lowest levels since September. While the Dow also faces a drop above 3%. S&P PMIs and the University of Michigan Consumer Sentiment and Inflation Expectations data will be out later this morning.

CURRENCY FUTURES

US DOLLAR: The USD is little changed and is set for a weekly gain as markets remain split on whether or not the Fed will lower interest rates in December following September’s labor report. The jobs report beat expectations but also showed an uptick in the unemployment rate with payrolls rising by 119,000, while August’s figures were revised lower by 26,000 to show a net loss of 4,000 jobs. The unemployment rate also edged up to 4.4% from 4.3%. Fed Funds futures are pricing a 69% chance of a rate cut in December, up sharply from yesterday. This will be the final labor market data ahead of the December FOMC meeting, leaving the dollar exposed to policy signals from Fed officials and PMI data out later this morning.

EURO: The euro slipped as PMI data showed that eurozone business activity held steady in November and in line with market expectations. Growth continued to be driven by the services sector, which posted its fastest rise in output in 18 months, while manufacturing activity declined, leading factories to cut jobs at their fastest rate in seven months. Germany’s manufacturing PMI fell to 48.4 in November from 49.6 in October, below expectations and marking the sharpest contraction in six months, while output slowed and export sales declined. The euro has also fallen on expectations that the Fed will skip a rate cut in December after September’s headline payroll data came in better than expected, and with the European Central Bank expected to hold rates steady for the foreseeable future, monetary policy expectations out of the US are likely to serve as the main catalyst for euro direction. CPI inflation for the eurozone was confirmed at 2.1% in October, next to the ECB’s 2% target.

BRITISH POUND: The sterling was little changed as markets await Britain’s upcoming budget, which is scheduled for release next week. Economic figures painted a disappointing picture of the economy as business growth barely inched, while retail sales declined more than expected. Composite PMI dropped to 50.5 in November from 52.2 in October, below forecasts. Services PMI, which accounts for the bulk of the economy, dropped to 50.5 from 52.3 after new business fell for the first time since July, while the manufacturing PMI showed growth for the first time since September 2024, edging up to 50.2 from 49.7. The data is supportive of a Bank of England rate cut, as private-sector employment fell at the fastest pace in four months, while prices charged by businesses rose by the smallest amount since December 2020. This coincides with recent data, which showed a drop in inflation in September. Retail sales growth declined by 1.0% in October, marking the first decline since May, as grocery store sales fell for the second straight month.

JAPANESE YEN: The yen strengthened against the dollar, pausing its decline following the release of a slate of economic data and the passage of a long-awaited stimulus package, and as Bank of Japan Governor Kazuo Ueda told members of parliament that a weaker yen could push up inflation, necessitating attention from the government. On the prices side, Japan’s annual inflation rate edged up to 3.0% in October from 2.9% in September, marking the highest reading since July. Core CPI, which excludes fresh food but includes energy, also rose 3%, as electricity prices rose across the country following the expiry of government rebates. The inflation readings give the BoJ some more room to raise rates in the near term. Elsewhere on the data front, PMI figures for November showed a slight recovery in manufacturing conditions, albeit with the index in its fifth consecutive month of a contractionary reading. Services activity remains unchanged, marking a continued expansion in activity. Japan’s exports rose 3.6% on the year, marking a seven-month high, and beating forecasts as a weaker currency made Japanese goods more affordable. Shipments to the US continued to decline for the seventh straight month amid low demand for autos. The figures led Japan to post a significantly lower trade deficit of 231.8 billion yen in October, down from 499.9 billion yen this time last year. On the fiscal front, Japan’s cabinet approved a 21.3 trillion yen stimulus package aimed at boosting economic growth, the largest since the pandemic. Meanwhile, Ueda’s comments added to speculation that the government could move to intervene in FX markets if the yen approaches 160 yen per dollar, which historically has been the level of past interventions.

AUSTRALIAN DOLLAR: The Aussie is little changed as PMI figures showed signs of strength in the economy in November, with the headline composite output expanding for a fourteenth month. The data, combined with improving business surveys, stronger consumer sentiment, falling unemployment, and a surging property market, makes it seem unlikely that the Reserve Bank of Australia will lower interest rates any time soon, and in fact, could be done with its easing cycle. On the central bank front, Assistant Governor Sarah Hunter said that the central bank is reassessing three key shifts in the economy: how firms are setting prices after the pandemic, how tight the labor market is, and changes in policy transmission given the stronger-than-expected housing response. Australia’s seasonally adjusted Wage Price Index rose by 3.4% year-on-year in Q3 2025, unchanged from the previous quarter and in line with market expectations.

Interested in more futures markets?  Explore our Market Dashboards here.