US Private Payrolls Beat Forecasts, Dampening Fed Rate Cut Hopes
A stronger-than-expected ADP jobs report has prompted traders to scale back bets on a December interest rate cut, complicating the outlook for equities.
A surprise uptick in private sector hiring has cast fresh doubt on the timing of the Federal Reserve's next interest rate cut, sending a ripple of caution through markets betting on a December policy pivot.
US companies added 42,000 jobs in October, a figure that, while modest, significantly outpaced economists' consensus forecast of approximately 30,000. The data, published Wednesday by the ADP Research Institute, challenges the narrative of a rapidly cooling labor market that has underpinned investor optimism for further monetary easing before year-end.
Following the report's release, the probability of a 25-basis-point rate cut at the Fed's December meeting fell sharply. Traders are now pricing in a roughly 65-70% chance of a cut, a significant drop from the more than 90% probability priced in just a week ago, according to data tied to the CME FedWatch Tool. This repricing reflects concerns that persistent labor market strength could prevent inflation from falling back to the central bank's 2% target.
The report's influence has been magnified by a delay in the release of the official US Bureau of Labor Statistics (BLS) employment data due to an ongoing government shutdown. This has elevated the importance of the ADP figures as a key gauge of economic health for investors and policymakers alike.
"Hiring was modest and broad-based in October," said Nela Richardson, chief economist at ADP. She noted that while the labor market is showing signs of balance, the data does not yet signal a definitive downturn that would compel the Fed to act aggressively.
Initial market reactions were measured but negative. US stock futures edged lower in pre-market trading as investors digested the implications of potentially higher-for-longer interest rates. The prospect of sustained tight monetary policy typically creates headwinds for equities by increasing corporate borrowing costs and making lower-risk assets like government bonds more attractive.
Despite the stronger hiring number, the report also contained signs of normalization. Annual pay growth for job-stayers remained at 4.5% for the second consecutive month, indicating that wage pressures, a key driver of inflation, are not re-accelerating.
Still, the headline number complicates the Federal Reserve's path forward. The central bank is navigating a delicate balancing act, aiming to curb inflation without triggering a sharp economic contraction. After a series of aggressive rate hikes, officials are now in a data-dependent mode, making each new economic report critical. Wednesday's report suggests the economy retains more underlying strength than many had anticipated, giving policymakers more room to hold rates steady.
Investors will now look ahead to other incoming data on inflation and consumer spending to gauge the Fed's likely course. The focus remains squarely on whether the economy is heading for a soft landing or if persistent strength will force the central bank to maintain its restrictive stance, delaying the policy relief that markets have been anticipating.