U.S. ADP employment data unexpectedly recorded a negative value, investors bet on the Federal Reserve cutting interest rates twice more this year
U.S. ADP employment data unexpectedly decreased by 32,000, far below expectations, raising market concerns about a deterioration in the job market, leading investors to bet on two more rate cuts by the Federal Reserve this year. Due to the government shutdown, the non-farm payroll report was canceled, making the ADP data an important reference. U.S. Treasury yields fell across the board, the dollar weakened slightly, but the three major U.S. stock indices briefly rose due to expectations of a government shutdown. The market expects a 99% probability of a 25 basis point rate cut by the Federal Reserve in October
The U.S. labor market has once again sent out warning signals. The ADP report released on Wednesday for September showed an unexpected decrease of 32,000 jobs in the private sector, far below Wall Street's expectation of an increase of 45,000. This "surprising" data has been interpreted by the market as the latest sign of significant deterioration in the U.S. job market, reinforcing investors' expectations of two more rate cuts of 25 basis points each by the Federal Reserve before the end of the year.
As the federal government partially shuts down due to a budget impasse, the ADP data, typically seen as a "leading indicator" for non-farm payrolls, has garnered unusual attention. With the Bureau of Labor Statistics (BLS) canceling the September non-farm payroll report originally scheduled for release this Friday due to the government shutdown, the market has to rely on ADP data to assess employment conditions in the short term.
Affected by the employment data, the U.S. Treasury market saw a surge in funds, with yields on Treasury bonds from 2 to 30 years declining across the board. The policy-sensitive 2-year Treasury yield fell by 6.1 basis points to 3.54%, marking a two-week low; the U.S. dollar index (DXY) also weakened slightly against major currencies. However, the three major U.S. stock indices closed higher, supported by expectations that the government shutdown would be brief, with both the Dow Jones and S&P 500 reaching historic highs.
According to the Zhitong Finance APP, Will Compernolle, a strategist at FHN Financial in Chicago, pointed out that the divergence between the deterioration of the job market and steady economic growth has forced investors to bet on rate cuts ahead of time. The latest revised data shows that the U.S. GDP growth rate for the second quarter has been adjusted upward to 3.8%. He added, "What makes this ADP report special is that there will be no non-farm data this Friday, and the recent large revisions to non-farm data have actually increased the reference value of ADP."
The CME FedWatch tool shows that federal funds rate futures traders have fully priced in a 99% probability of a 25 basis point rate cut by the Federal Reserve in October, while the probability of another rate cut in December has risen to 86.7%, up from the previous day's 77.3%. Currently, the Federal Reserve's policy rate range is 4% to 4.25%, having just implemented a small rate cut in September.
Market analysts generally believe that if the shutdown continues and key economic data for October is missing, it could interfere with the Federal Reserve's policy judgment after December. However, in the short term, the sharp weakening of the labor market and the response from the bond market are sufficient for the Federal Reserve to continue cutting rates at its meeting this month.
Nadir Belbarka, an analyst at XMArabia in Dubai, bluntly stated that the ADP data recorded a "deep negative value," highlighting the severe contraction of the U.S. job market. In an email comment, he pointed out that this result fell far short of expectations, and the market reaction was further amplified by the decline in U.S. Treasury yields
