Shutdown Could Delay Friday’s Jobs Report

STOCK INDEX FUTURES

Stock index futures are lower after the US government entered a shutdown with the Senate unable to agree on a temporary funding deal. The shutdown consequently prevents government organizations from releasing economic data, including Friday’s much-anticipated jobs report. The length of any shutdown may be key for markets, as the Fed’s next policy decision on October 29 remains weeks away. Traders currently see a quarter-point cut with market-implied odds of around 96.8%.

ADP nonfarm payroll figures showed that private-sector employment fell by 32,000, below expectations of a gain of 52,000 while August’s data was revised downward from 54,000 to a loss of 3,000 jobs. With Friday’s jobs report seemingly out of the picture, markets will place greater importance on private-sector economic indicators. The data comes after Tuesday’s JOLTS data showed signs of labor softening with job openings increasing slightly while hiring slowed. The indexes closed out their strongest third quarter since 2020 yesterday, although the mood has soured as markets weigh the impact of the shutdown. The longer the shutdown lasts, the more likely it is to impact growth in the economy as businesses that rely on federal output are likely to get hurt.

CURRENCY FUTURES

The USD index is lower following the release of weak  ADP employment data and as the US government shutdown threatens to delay important jobs data at the end of the week. In absence of Friday’s jobs report, emphasis will fall on private-sector economic indicators such as today’s ADP nonfarm employment change. The report showed that private sector employment lost 32,000 jobs, well below expectations. The US government failed to pass a spending measure to keep government operations afloat through November late Tuesday night. The Senate is due to vote again Wednesday morning. The dollar fell lower Tuesday following a mixed reading from the JOLTS jobs report, which showed job openings increased marginally while hiring decline slightly, consistent with a frozen or softening labor market. Markets pricing a 96.8% chance that the Fed will cut rates in October.

Euro futures edged higher against the dollar following the release of ADP employment data and eurozone inflation figures, which showed an acceleration of inflation, cementing expectations that the European Central Bank will leave its key interest rate unchanged for the remained of the year. Consumer prices rose to 2.2% in September, up from 2.0% in the previous three months and in line with expectations. The increase in inflation was driven mainly by a smaller decline in energy costs, which fell 0.4% compared to a 2.0% drop in August. Additionally, stronger-than-expected inflation in Germany helped push the rate higher. Core inflation was stable, however, services inflation picked up pace to 3.2% on the year. The data points to signs that underlying price pressures have not fully eased and with inflation now above the ECB’s 2% target, it looks likely that the central bank will stand pat for the remainder of the year. Regardless, the ECB forecasted that the uptick in inflation and expects it to be short-lived. ECB President Christine Lagarde said Tuesday that inflation is unlikely to rise much above, or fall much below, the bank’s target in the months ahead. Additionally, trade shocks are not causing new upward pressure on prices or causing much damage to activity as initially feared. Looking to 2026, inflation is expected to fall below the bank’s 2.0% target, which could prompt the ECB to cut rates.

British pound futures are higher as the dollar weakened broadly following the release of ADP employment data. British house prices rose more-than-expected, increasing 0.5% in September after a 0.1% drop in August. Real wage growth in the country has slowed to 1% from 3.4% a year ago, while inflation has remained sticky.  GDP data showed the economy grew 1.4% year-over-year, higher than the 1.2% in the initial estimate. On a quarterly basis, the economy grew 0.3%, in line with preliminary figures. Investor focus remains on the widely held opinion that finance minister Rachel Reeves will hike taxes later in November. Reeves said on Monday she would not to raise sales tax, known as value added tax (VAT), national insurance contributions or the rates of income tax. Markets still pricing in the next rate cut from the Bank of England to happen in 2026, as inflation remains a challenge and as BoE officials lean towards a hawkish policy stance.

Japanese yen futures are higher as flight to quality and speculation about the Bank of Japan raising interest rates drove yen strength. The Bank of Japan’s quarterly Tankan corporate survey showed confidence among large Japanese manufacturers improved for the second straight quarter while firms maintained upbeat spending plans. The BoJ had highlighted the survey as a key gauge for the timing of rate hikes, with markets now pricing in a 39% chance of a quarter-point increase at this month’s policy meeting. BoJ officials have leaned hawkish in recent days, board member Asahi Noguchi (dove) said on Monday that the need for policy tightening was increasing “more than ever.” Japan’s top trade negotiator Ryosei Akazawa said on Wednesday that its US-bound investment package of $550 billion will have no impact on the foreign exchange market.

Australian dollar futures are little changed against the dollar despite scaled-back expectations of near-term rate cuts from the Reserve Bank of Australia.

The RBA left its cash rate steady on Tuesday at 3.60%. The bank said recent data suggested that inflation might tick higher than initially forecast in in the third quarter. The commentary from the bank leaned on the hawkish side and led markets to trim bets on rate cuts this year and saw some analysts call an end to the banks easing cycle if economic conditions remain upbeat. Unemployment remains historically low, Q2 GDP was robust, and August’s monthly inflation reading came in at 3%, factors that have added to expectations that November’s meeting may not see a rate cut either. The central bank had forecast headline inflation, which ran at 2.1% last quarter, to pick up to 3.1% by the middle of next year, as electricity rebates fade, but core inflation is expected to stay anchored around 2.6% over the coming years. Markets now imply only a 35% chance of a cut in November and 50% for December, and have priced in 29 basis points of total easing, compared with 47 basis points a couple of weeks ago.

INTEREST RATE MARKET FUTURES

Futures are higher across the board as ADP’s weak employment data added to expectations that the Fed will cut rates in October and beyond as markets may miss out on Friday’s jobs report due to the shutdown. ADP reported a surprising decline in private-sector payrolls. The data underscores sentiment that the labor market is softening as employers have been cautious with hiring despite strong economic growth in the second quarter. The report also detailed the job creation continued to lose momentum across most sectors. The data reflected the first  back-to-back decline in employment since the covid shock in 2020. Bets on a October rate cut increased following the release of the data while odds of a cut in December increased from 77.3% on Tuesday to 87.4% this morning. It should be noted that some economists see the ADP report as a poor predictor of the more comprehensive nonfarm payrolls, which is expected to be delayed due to the shutdown.

Yields were mixed across the curve on Tuesday in reaction to a slew of softer economic data. Case-Shiller and FHFA reports showed home prices ticked down, Chicago PMI fell further, consumer confidence took a dive, and the JOLTS data showed signs of labor market softening. Hiring and layoffs were little changed in August, with the rate of layoffs staying steady at 1.1% while new job offers held at 3.2%. The number of open jobs edged higher to 7.23 million from 7.21 million, keeping the rate of job openings at 4.3%. The data eased fears of a major labor market slowdown and continued to point to signs that firms are reluctant to lay off workers despite the uncertain economic backdrop.

Investor focus remains on Friday’s jobs report, if it is released. Cautious comments by Fed Chair Powell, followed by a string of stronger-than-expected economic data, including an unexpected sizeable upgrade to Q2 GDP, sparked some doubts about prospects of back-to-back rate cuts. Analysts expect nonfarm payrolls to rise by 51,000 while any revisions to previous data will be scrutinized.

The spread between the two- and 10-year yields rose to 55.5 bps from 51.9 bps on Tuesday, while the 2-year yield, which reflects interest rate expectations, fell to 3.545%.

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