- Private US employment dropped in June when economists had expected an increase.
- US service sector business activity plunged.
- All eyes are on the US nonfarm payrolls.
Interest futures surged Wednesday as Treasury yields fell with the dollar after a series of poor US economic reports. Meanwhile, markets remained closed on Thursday as the US observed Independence Day.
Data on Wednesday revealed that private employment dropped in June when economists had expected an increase. The ADP employment figures showed that 150,000 more people were hired in June. This was a drop from the previous month when the economy added 157,000 jobs. Moreover, it was lower than the forecast of 163,000. Although the drop was small, it was a sign that demand eased.
More data showed that service sector business activity plunged, with the ISM PMI falling from 53.8 to 48.8. Both these reports pointed to a slowdown in the economy. Consequently, Fed rate cut expectations increased. This, in turn, led to a decline in yields, which boosted interest futures.
US Treasury index (Source: Bloomberg)
Earlier in the week, a surge in Treasury yields weighed on interest futures. Yields have risen for two months and continued higher as investors bet more on a Trump win after last week’s presidential debate. Although it is still early in the race, Trump emerged stronger than Biden after the debate. Consequently, markets looked at the possibility of higher tariffs and government borrowing. This would also lead to higher US yields, hurting interest futures.
As the race for the November election continues, traders will pay close attention to the polls. If Trump stays in the lead, it could mean further declines in interest futures.
However, the immediate focus now is on the Fed’s rate cut outlook. After the recent poor data, markets have raised expectations for a cut in September to 73%. Moreover, Powell took a more dovish stance when he spoke earlier in the week, noting that inflation was on a downtrend. However, he emphasized that policymakers still need evidence that this trend will continue. Therefore, they will wait for more economic data.
Consequently, all eyes are on the US nonfarm payrolls. Forecasts show the country added 191,000 jobs in June, lower than last month’s 272,000. If the actual figures miss forecasts, rate-cut bets will surge. On the other hand, if they beat forecasts, the outlook for rate cuts will remain uncertain.
