The United States ADP Employment Change 4-week average rose to 10.3K in January 2024. It had been 6.5K in the previous period.
Looking back, that small climb in the ADP 4-week average in January 2024 was an early sign of the labor market’s surprising resilience. We saw this trend of economic strength continue through 2024 and 2025, which kept the Federal Reserve from cutting rates as soon as the market had hoped. This extended period of higher rates has defined the environment we are trading in today.
Shifting Rate Cut Expectations
Now, in February 2026, the narrative is finally shifting after the last jobs report showed the slowest hiring pace in over a year. With core inflation having recently fallen to 2.3%, the data suggests the economy is finally cooling enough for the Fed to act. The market is currently pricing in a greater than 70% chance of a first rate cut by the May meeting.
For interest rate traders, this means positioning for the start of an easing cycle. We see value in using SOFR futures options to bet on a faster pace of cuts than is currently priced in for the second half of the year. The primary risk is a sudden re-acceleration in economic data, which seems unlikely at this point.
In the equity markets, this creates uncertainty that can be traded with derivatives. While rate cuts are typically bullish for stocks, the slowing economic growth that prompts them can hurt earnings. Therefore, we believe buying VIX call options or using collars on major indices like the SPX offers a cost-effective way to protect against a potential downturn in the coming weeks.
We also see opportunities in currency derivatives, as the U.S. Dollar has been strong for nearly two years. As the Fed moves closer to cutting rates, the dollar is likely to weaken against currencies where central banks remain more hawkish. Long-dated options on currency pairs like the EUR/USD could provide leveraged exposure to this developing trend.
