Market Turmoil as US Jobs Data Disappoints
Financial markets experienced significant movements on Tuesday as private employment data revealed unexpected weakness in the US labor market. Treasury futures witnessed a strong rally while the American dollar slid to its lowest level in nearly two weeks. The catalyst for this market shift came from the ADP Research Institute's weekly employment figures, which indicated a concerning slowdown in job creation during the ongoing government shutdown.
Key Market Movements and Data Points
With cash Treasury trading suspended for the Veterans Day holiday, futures on 10-year Treasury notes became the center of attention. These instruments rallied substantially following the ADP labor data release and maintained their gains throughout New York trading sessions. By 2:55 p.m. New York time, the movement suggested an approximate five basis-point decline in the equivalent 10-year yield, which had concluded Monday's trading at 4.12%.
The employment statistics revealed that US companies eliminated an average of 11,250 positions per week during the four-week period ending October 25. This data has gained exceptional importance due to the federal government's closure, making it one of the few reliable current indicators of labor market conditions.
Federal Reserve Expectations Shift
Money markets quickly adjusted their expectations regarding Federal Reserve policy, now pricing in more than a 60% probability of interest rate reduction next month. This assessment comes from swaps tied to policy-meeting dates and represents a significant shift in market sentiment.
Blerina Uruci, chief US economist at T. Rowe Price, commented to Bloomberg Surveillance that the recent figures contradict the prevailing view of labor market stability. She emphasized the need for careful interpretation, noting that October data would likely be particularly volatile due to shutdown-related disruptions.
The prospect of increased monetary easing prompted the Bloomberg Dollar Spot Index to drop to its lowest level in almost two weeks. Meanwhile, the euro briefly climbed above the $1.16 threshold for the first time this month, and the yen stabilized around 154 per dollar after initial surges following the ADP release.
Global Bond Markets and Political Developments
The rally in Treasury futures outpaced movements in most other major global sovereign markets, with the notable exception of UK bonds. British debt instruments extended their gains following the US jobs report, driving the 10-year yield down by as much as nine basis points to 4.37%, approaching its lowest level this year.
In Europe, France's 10-year debt rallied less than two basis points to 3.42%, while Germany's equivalent instrument gained approximately one basis point to reach 2.66%. Canadian cash bond and interest-rate derivative markets remained closed for the holiday.
Political developments offered some hope as the shutdown appeared nearing its conclusion following Senate passage of a temporary funding measure. House lawmakers are expected to vote on the spending package, which would maintain most government operations through January 30, potentially as early as Wednesday.
Kit Juckes, head of foreign-exchange strategy at Societe Generale, warned that volatility could increase once the shutdown concludes. He suggested that if economic data remains weak, recent dollar optimism might reverse significantly.
According to a Bloomberg survey, most economists anticipate Fed officials will reduce borrowing costs by a quarter-point during their December 9-10 meeting. However, uncertainty persists following recent comments from Chair Jerome Powell and other Fed officials indicating that a rate cut is not guaranteed.
Deutsche Bank economists Amy Yang and Matthew Luzzetti noted in their recent analysis that significant divisions remain within the Federal Open Market Committee. They observed that the threshold for a December rate cut has clearly increased, suggesting ongoing debate about the appropriate policy response.
