The US ADP employment figures for August were 54,000, below the expected 65,000. Meanwhile, the ISM services PMI for August came in at 52.0, compared to the forecasted 51.0. The S&P Global final services PMI for September reported at 54.5, a decrease from the preliminary 55.4. Initial jobless claims in the US reached 237,000 against an expected 230,000. Additionally, US Q2 unit labour costs rose by 1.0%, slightly below the forecast of 1.2%.
US oil inventories saw an increase of 2,415K, despite an expectation of a decrease by 2,031K. Canada’s July trade balance showed a deficit of 4.94 billion, wider than the forecast of 4.75 billion. The US trade balance for July reflected a deficit of 78.3 billion, larger than the expected 75.7 billion. In financial markets, gold prices dropped by $8 to $3,550, while WTI fell by 71 cents to $63.26. The S&P 500 gained 53 points to 6,501, reaching a record high. US 10-year yields decreased by 4.6 basis points to 4.16%. The US dollar showed strength, especially against the NZD, despite recent declines in USD/JPY being offset. The market remains relatively calm ahead of the upcoming non-farm payrolls report.
Fed Policy and Market Reactions
The market is signaling a belief in a soft landing, with the S&P 500 hitting a new record of 6501. This “middling growth” scenario is ideal for stocks because it allows the Federal Reserve to continue its path of gradual rate cuts. For traders, this environment supports selling puts to collect premium, betting that the market’s floor is solid for now.
We see Fed policy as the main driver, with officials confirming the plan for gradual rate cuts. This is a significant shift from the aggressive hiking cycle we saw through 2023, which was designed to combat inflation that had peaked above 9%. The drop in 10-year yields to 4.16% reflects this, so positions favoring lower rates for longer, like Treasury call options, remain attractive.
The labor market data is key, with ADP employment at just 54K and jobless claims rising to 237K. This shows a clear cooling from the very tight conditions of last year, when job growth was consistently over 150K and claims were lower. This slowdown gives the Fed the green light to continue easing policy without worrying about reigniting wage pressures.
Market Sentiment and Economic Indicators
Despite the mix of data, there appears to be little anxiety in the market ahead of tomorrow’s major payrolls report. Volatility, much like it was for long stretches in 2024 when the VIX often traded below 15, is low, which makes protective options relatively cheap. A surprise in the jobs number could cause a sharp move, so buying straddles or strangles offers a low-cost way to profit from a spike in volatility.
The US dollar is strengthening even as yields fall, suggesting the US economy is still outperforming other regions. The surprise build in oil inventories, pushing crude down to $63, reinforces the narrative of subdued global demand. This backdrop makes long USD positions against weaker currencies like the NZD logical, while the outlook for oil remains bearish.
