US employment drops in November, Fed rate cut expectations rise

In focus today

In the US, the Challenger report of November layoff and hiring announcements is due for release in the afternoon. While not usually a tier-1 market mover, it is one of the few timely data points on labour markets that will be available for the Fed before next week's meeting due to the delays caused by the government shutdown. 

In Sweden, the preliminary inflation figures for November are released today. Our forecast is CPIF excluding energy at 2.8%, CPIF at 2.8%, and CPI at 0.8%. The monthly change in core inflation from October to November is estimated at -0.19, primarily attributed to Black Friday sales. Higher prices for electricity and petrol are expected to result in a monthly increase in CPIF of 0.25%.

Economic and market news

What happened overnight

In Japan, Bank of Japan Governor Kazuo Ueda flagged uncertainty about how far rates can be raised due to the difficulty of estimating the country's neutral interest rate, which is currently projected between 1% and 2.5%. Ueda also hinted at a potential rate hike to 0.75% later this month as the central bank evaluates the "pros and cons" of tightening monetary policy.

In China, government advisers expect Beijing to stick to its 5% GDP growth target for 2026 as policymakers seek to counter deflationary pressures, a property slump, and weak consumer demand. Fiscal and monetary stimulus, including bond issuance and subsidies, are likely to continue, while leaders aim to gradually shift towards a consumption-led economic model over the next five years.

What happened yesterday

In the US, private sector employment decreased by 32k in November, according to the ADP report (cons: +10k). The decline was driven by manufacturing job losses, while services employment remained more resilient, aligning with weaker forward-looking signals from PMI and ISM data. This supports expectations for a Fed rate cut next week, with EUR/USD ticking higher. Meanwhile, ISM services PMI rose to 52.6 in November (cons: 52.1, prev: 52.4). Positively for the Fed, the price index declined sharply, suggesting easing inflation pressures, though the PMI index sent a conflicting signal. Looking across the two surveys, it seems that service sector activity continues to grow at a decent pace.

US Secretary of Treasury Scott Bessent advocated that Federal Reserve regional bank presidents must have lived in their districts for at least three years. This is an interesting headline because it suggests the administration is preparing to get involved with the (re-)nominations of Regional Fed presidents, due in February. Regional Feds elect their own presidents, but the picks are subject to the approval of Fed governors, who are nominated by US president.

In the euro area, the final composite PMI for November was revised up to 52.8 (flash: 52.4), driven by an upward revision in services PMI to 53.6 (flash: 53.1), while manufacturing PMI was slightly lowered to 49.6 (flash: 49.7). According to the PMIs, the services sector is now growing at its fastest pace in two and a half years, highlighting resilience in the domestic economy and supporting expectations for unchanged policy rates from the ECB.

In the UK, PMIs fell to 51.2 (prior 52.2) but came in stronger than consensus expectations at 50.5. It reflected the seventh consecutive month of expansion in the UK's private sector activity, with the upside surprise sparking a strengthening of the GBP.

In Switzerland, November inflation came in lower than expected. Headline inflation dropped to 0.0% (cons: 0.1%, prior: 0.1%) and core inflation edged lower as well to 0.4% (cons: 0.5%, prior: 0.5%). The SNB is still expected to remain firmly on hold at the next meeting in December, keeping the policy rate at 0%. SNB members have reiterated that inflation below 0% would be tolerable for a short period of time. We expect the first course of action to be FX intervention before resorting to a cut into negative territory.

In Sweden, services PMI rose strongly to 59.1 in November (prev: 55.9), signalling robust growth in the sector. Business volumes saw a significant jump to 65.2 (prev: 55.3), while the employment index edged higher to 49.9 (prev: 47.8). Overall, the data adds to the recent positive signals from the Swedish economy.

In Poland, the central bank cut its main interest rate by 25bp to 4.00%, marking the sixth rate cut this year, following a sharper-than-expected drop in November inflation to 2.4% y/y (cons: 2.6%). The Monetary Policy Council highlighted risks from fiscal policy, wage dynamics, and global inflation but indicated future rate decisions would depend on incoming data.

The European Commission unveiled an "economic security doctrine" aimed at cutting over-reliance on Chinese metals and other single-source suppliers. The REsourceEU Action Plan seeks to diversify supply chains, accelerate trade measures, and prioritise support for businesses reducing foreign dependencies in critical sectors.

Equities: Equities pushed higher again yesterday, led by the US but notably not driven by mega-cap tech. Instead, gains were broad-based, with the VIX edging lower and min vol stocks underperforming. Small caps materially outperformed, marking another classic shift towards a slightly more constructive investor risk-optic. In our view, somewhat interesting given that macro data was generally solid, particularly in Europe, while the US delivered a disappointing ADP print, which remains our primary concern. In US yesterday, Dow +0.9%, S&P 500 +0.3%, Nasdaq +0.2%, Russell 2000 +1.9%. Asian equities trade higher this morning, predominantly supported by Japan on renewed expectations of a fiscal "bazooka" and a persistently accommodative global monetary backdrop ex-Japan. European equity futures are modestly firmer, whereas US futures are essentially flat.

FI and FX: GBP was the top performer during yesterday's session as final November PMIs came in a lot stronger than expected. CHF was largely unfazed by lower-than-expected November CPI. EUR/USD rose to the 1.1670 mark supported by weaker US data while EUR/SEK and EUR/NOK tracked lower during yesterday's session. US yields moved lower during yesterday's session, both in swap and Treasury space, dropping 2-3bp across the curve. In euro space, the moves were very limited with yields largely trading flat across curves and tenors.