TD Securities anticipates that US employment data will fall short of consensus estimates for both ADP employment and ISM services. They foresee a modest bull steepening as markets await the delayed NFP report. The analysis suggests a decline in ISM services, particularly in employment and new orders.
On Wednesday, the US Treasury’s quarterly refunding is expected, with auction sizes likely remaining unchanged. Forward guidance suggests these sizes will stay constant for the next several quarters. ISM services are expected to decrease to 52.8 from a previous 53.8, reflecting a mean-reversion from December’s unexpected increase.
Focus Areas in Upcoming ISM Services Release
The focus will be on declines in employment and new orders as key factors in the upcoming release. This article was generated with AI and reviewed by an editor. The FXStreet Insights Team, consisting of handpicked journalists, compiles observations from market experts, enhanced with insights from analysts.
With employment data expected to come in soft, we are watching for opportunities in interest rate derivatives. The market is now pricing in a higher probability of a Fed rate cut by mid-year, a significant shift from the sentiment just a month ago. This suggests positioning through options on SOFR futures to capitalize on a more dovish policy turn.
The recent Chicago PMI print for January, which fell to 48.1, already signaled a slowdown in business activity, lending credibility to a weaker-than-expected ISM services reading. This follows a trend we saw developing in the final quarter of 2025 where hiring momentum began to fade. Therefore, we view any short-term strength in the dollar as a selling opportunity.
Opportunities and Market Strategies
The expectation of a bull steepening in the Treasury curve presents a clear derivatives play. We are considering positions that profit from falling long-term yields relative to short-term yields, such as a long 10-year versus short 2-year Treasury futures spread. This strategy is supported by historical patterns where the curve steepens ahead of an anticipated easing cycle by the central bank.
As we observed during similar slowdown scares in 2025, signs of economic cooling can increase market volatility. Consequently, we are looking at purchasing call options on the VIX index as a cost-effective way to hedge against a potential equity market downturn in the coming weeks. A weaker Non-Farm Payrolls report, when it is released, would likely act as the primary catalyst for such a move.
