Weak Payrolls Data Cements Fed Cut Hopes

STOCK INDEX FUTURES

Stock index futures are mixed, with the S&P and Nasdaq leading gains while the Dow remained flat following the release of August’s nonfarm payrolls report, which supported the case for a September rate cut from the Fed and opened the door for more easing afterwards.

Job growth was minimal, with nonfarm payrolls rising by just 22,000, well below expectations of 75,000 while the unemployment rate was little changed at 4.3%. Gains in health care and social assistance were offset by declines in federal government jobs, mining, and manufacturing—where strike activity contributed to losses. Wage growth remained solid, but labor force participation and hours worked showed little change. The weak payrolls figures likely open the door for multiple rate cuts from the Fed this year.

The ISM Services PMI rose to 52 in August, marking the strongest expansion in six months and beating expectations. Growth in business activity, new orders, and inventories drove the improvement, but persistent weakness in employment, a sharp drop in order backlogs, and elevated prices tempered the optimism. Respondents cited tariff concerns and pre-holiday inventory buildup as key factors influencing activity. The data paints a better picture than the manufacturing sector, 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 sharply lower following the weak nonfarm payrolls data, which showed hiring stalled in August, reinforcing expectations that the Fed will cut rates in September. Given the very weak figures, rate cuts from the Fed after the September meeting seem likely as the bank will need to move to cut rates in order to maintain employment in the country. Previous revisions to the data showed job growth in June and July combined were 21,000 lower than previously reported, highlighting the cooling labor market.

Euro futures are  higher, boosted by a weaker dollar following the weak labor data out of the US. GDP data out of the eurozone showed that GDP grew 0.1% in the second quarter, a slowdown from the first quarter’s 0.6% growth and in line with expectations. The slow growth was in part driven by a decline in output from Germany, where output declined 0.3% as the economy took a hit from US tariffs. Manufacturing orders in Germany fell for a third straight month, declining 2.9% in July, highlighting weakening demand. Foreign orders for German goods fell 3.1%, while orders inside the eurozone, which are less likely to be subject to levies, fell 3.8%. Domestic orders declined 2.5%. On a positive note, the slump was driven by a drop in large-scale orders. Without large-scale items, orders grew 0.7%. As a whole in the eurozone, a decline in exports and investment contributed to the sluggish growth figure whereas household spending, kept rising, likely garnering attention policymakers at the European Central Bank for its impact on inflation. The figures also reinforce expectations that the ECB will not cut rates at its next meeting after other data published this week showed an uptick in inflation in the region, a decline in unemployment, and a marginal increase in private sector activity. Consumer prices rose 2.1% in August in the eurozone, up from 2.0%. Core inflation was unchanged at 2.3%.

British pound futures are higher, benefitting from a weaker dollar. UK retail sales increased in July, growing 0.6% in the month, above expectations of 0.3%. The boost was likely owed to seasonality factors such as better weather across the region and the women’s European soccer championships. As such, the gains are unlikely to be repeated in the coming months, especially as looming tax hikes will weigh on households in the UK.  Long-dated UK government bond yields surged to their highest levels since 1998 earlier in the week, driven by a broad sell-off. While higher yields typically support the pound, concerns about long-term growth rather than inflation have weighed on the currency. Bank of England Governor Andrew Bailey signaled that interest rates are likely to fall, though the pace of cuts remains uncertain. Money markets are pricing in a rate cut at the BoE’s September meeting, but expectations for further easing are mixed. Inflation rose to 3.8%, though many price pressures are expected to ease. The UK’s challenging fiscal backdrop could prompt additional rate cuts if economic conditions deteriorate. Finance Minister Rachel Reeves is expected to raise taxes in her autumn budget to meet fiscal targets, potentially complicating efforts to stimulate growth and adding to the headwinds facing the economy.

Japanese yen futures are higher as the dollar fell following US jobs data. Household spending in Japan rose 1.7% in July, above expectations of 1.3%. Real wages in Japan grew in August, driven by steady base pay gains and an increase in summer bonuses. The rise in wages are a good sign for the Bank of Japan in its efforts to raise interest rates in the future. Political uncertainty and dovish central bank commentary continue to weigh on the yen, despite a successful 30-year bond auction that helped stabilize long-term yields. While Tokyo’s core CPI remains above target, weak industrial production and retail sales suggest Japan’s economy isn’t strong enough to support a rate hike yet. The BoJ remains cautious, emphasizing global risks, even as unemployment shows signs of labor market resilience.

Australian dollar futures are higher on a weaker dollar. Australian data this week has so far generally beaten forecasts, leading markets to pare back easing expectations from the Reserve Bank of Australia. Markets imply an 80% chance of a quarter point cut in the 3.60% cash rate in November, compared to 100% at the start of the week. 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. 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. 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 board following the weak labor data that saw payrolls rise by only 22,000, well below forecasts of 75,000. The federal government sector led the decline in job growth in August, shedding 15,000 jobs, and is down 97,000 jobs since its peak in January. Other notable contributors to the decline included manufacturing, which lost 12,000 jobs—with transportation equipment manufacturing down 15,000 due in part to strike activity—and wholesale trade, which also fell by 12,000 jobs. Wage growth was modest, with average hourly earnings up 0.3% month-over-month and 3.7% year-over-year, while the average workweek held at 34.2 hours. Notably, revisions to prior months showed June was worse than initially reported (-13,000), and July slightly better (+79,000), resulting in a net downward revision of 21,000 jobs. Overall, the labor market appears to be cooling but remains stable given the unemployment rate. Questions as to the supply of labor remain. Given the immigration situation in the US, the economy will likely need to add fewer jobs than it historically has in order to maintain a lower unemployment rate. The data cemented the case for a rate cut in September and has opened the door for further easing from the Fed. Fed funds futures have priced in a 100% chance of a rate cut in September, and a 74% chance of an additional 25 bp rate cut at the following meeting in October.

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.

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 rose to 59.5 bps from 58.5 bps on Thursday.

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