Markets rally on weak jobs data as Fed rate cut looms

US equities ended Wednesday’s session on the front foot across nine of the eleven sectors, as traders responded to the softer-than-expected US ADP payrolls data that has solidified expectations for another 25-bp Fed rate cut next week. Markets are pricing in -21 bps of easing (85% probability) for the upcoming meeting, with a cumulative -87 bps worth of cuts by the year-end 2026.

The S&P 500 climbed 0.3% to 6,849, the Nasdaq 100 rose 0.2% to 25,606, and the Dow Jones Industrial Average gained 0.9% to 47,882. The USD took a hit, sending the USD Index 0.5% lower and below its 50-day SMA at 99.13. Sterling capitalised on USD weakness, gaining 1.1%, though given the UK's economic headwinds and current government policies, this strength may prove fleeting – potentially setting up a sell-on-rally dynamic.

European markets displayed relatively muted activity in recent trading, with commodities similarly subdued. In Asia-Pacific markets, however, we saw notable upside in Japanese Stocks; the Topix and Nikkei 225 added more than 2.0% each, outperforming gains in the MSCI Asia Pacific Index on strengthening Fed easing expectations.

Labour market deterioration drives Fed rate cut probability to 85%

Wednesday’s November ADP private payrolls data revealed that US companies shed 32,000 jobs, compared to a gain of an upwardly revised 47,000 in October. This represents the fifth contraction this year! Small businesses bore the brunt in November, losing 120,000 jobs, while medium and large enterprises added approximately 90,000 positions, partially offsetting the decline.

The ADP report marked the largest contraction since March 2023 and was meaningfully below the market’s median estimate of a 10,000 gain. Before the shutdown, this was considered a tier-2 print, though given the absence of official numbers, this report has taken on significant importance.

Adding to this labour market weakness, while you will likely recall that the delayed BLS September US employment report showed a gain of nearly 120,000 jobs, growth was concentrated in only a handful of sectors. The majority showed little to no growth, and unemployment also rose to 4.4%.

All eyes on US PCE data as Fed decision approaches

Although inflation remains above the Fed’s 2.0% target, and while the US PCE data out on Friday will draw eyes, focus remains well and truly on the labour market.

Following Monday’s November ISM manufacturing PMI – which showed the headline number contracting further to 48.2 (from 48.7 in October), along with the employment (prices paid) component dropping (rising) – we also had the November ISM services PMI out yesterday. The ISM services report indicated activity expanded at a slightly faster pace in November, whilst a measure of prices paid dropped to a seven-month low, offering some relief on the inflation front. These mixed signals have done little to dampen expectations for Fed easing.

In terms of event risk today, US weekly unemployment claims figures (week ending 29 November) are out at 1:30 pm GMT, expected to have ticked moderately higher to 219,000 from 216,000 in the week prior. However, the market’s focus will be on tomorrow’s delayed September US PCE report at 3:00 pm. Economists forecast YY headline PCE data to have ticked slightly higher by 2.8% from 2.7% in August, while the YY core measure is expected to have remained steady at 2.9%, suggesting inflationary pressures are sticky but stable.

As of writing, I feel that current data makes a strong case for rate cuts given the weakness in the jobs market. Unless there is a sizeable upside deviation in the PCE inflation print tomorrow, I do not see this altering Fed rate pricing much.