The ISM services index increased to 53.8, marking its highest point since late 2024. Additionally, the prices paid component rose to 66.6, suggesting potential inflationary pressure in the US.
The ADP private payrolls report was weaker than anticipated, recording 22k compared to the expected 45k. Despite this, Treasury curves steepened slightly, with 10-year yields increasing to 4.28%.
Dollar Index Movement
The Dollar Index moved to the 97.80 area, reflecting a supportive US economic environment. Treasury yields varied, with the 2-year yield decreasing by 1.6bps, while 10-year and 30-year yields rose by 1.0bps and 2.3bps, respectively.
Looking back to early 2025, we can see the market was grappling with conflicting signals. The ISM services index was at its highest since late 2024, but the ADP payrolls report was surprisingly weak. This backdrop set the stage for a volatile year for interest rate expectations.
That high prices paid component from January 2025 proved to be a reliable warning, as core inflation remained stubbornly above 4% for most of last year. We are now seeing signs of relief, with recent data from late 2025 showing a steady decline in inflation pressures. For example, the latest Core PCE reading for December 2025 came in at 3.4%, well off its mid-year highs.
Market Shifts and Strategies
The Dollar Index, which touched 97.80 back then, went on to peak above 101 later in 2025 as the Federal Reserve held rates steady. However, the dynamic has shifted, with the index now trading near 95.50 as the market prices in policy easing. CME FedWatch futures are currently indicating a greater than 70% probability of a rate cut by the June 2026 FOMC meeting.
This environment suggests positioning for a weaker dollar and lower long-term interest rates in the coming weeks. Options strategies like buying puts on the Dollar Index or purchasing call options on Treasury bond futures could be effective. Implied volatility in interest rate markets has picked up, suggesting traders should be mindful of the cost of these positions.
