US Stocks Rally as Weak Jobs Data Fuels Fed Rate Cut Hopes
A new preliminary estimate from ADP showed job growth slowed dramatically, reinforcing investor bets on monetary easing as the Federal Reserve meets.
Wall Street pushed higher on Tuesday, with major indices touching fresh records as investors seized on signs of a rapidly cooling labor market as a potential catalyst for the Federal Reserve to cut interest rates.
A new preliminary report from ADP, a major payroll processor, showed that the U.S. private sector added just 14,250 jobs in the four weeks leading up to October 11. This figure represents a sharp deceleration in hiring and adds to a string of data suggesting the job market is losing momentum, a development that is paradoxically fueling market optimism.
The S&P 500 climbed 1.2% to a new high of 6,875.16 in afternoon trading, while the tech-heavy Nasdaq Composite led gains, advancing 1.9%. The Dow Jones Industrial Average also rose 0.7%. The rally reflects a growing conviction among traders that weakening economic data will give Fed officials, who are currently holding their two-day policy meeting, the justification needed to begin easing monetary policy.
This “bad news is good news” sentiment has become a dominant theme in the market. The thinking is that a softer labor market will alleviate upward pressure on wages and inflation, giving the central bank cover to lower borrowing costs and support the economy. The modest gain in the latest ADP estimate is particularly stark when compared to the full ADP National Employment Report for September, which revealed an unexpected loss of 32,000 private sector jobs.
"The recent trend in employment data, from the September losses to this very modest preliminary gain, strengthens the argument for lower rates," noted one analyst at Hilltop Securities in a recent commentary. The unexpected decline in September fueled expectations for Fed action, and this new data keeps that narrative firmly in place.
The data was released as the Federal Open Market Committee (FOMC) began its October meeting, with a policy decision expected Wednesday. While the market has been pricing in a high probability of a rate cut for weeks, this latest piece of employment data is seen as cementing the case for action.
Investor focus will now shift to the Fed's official statement and the more comprehensive monthly jobs report from the Bureau of Labor Statistics (BLS), due later this week. The BLS data is considered the benchmark for the U.S. labor market, and investors will be watching closely to see if it confirms the slowdown signaled by ADP's recent reports. A similar weak reading from the BLS would almost certainly intensify calls for monetary easing and could provide further fuel for the equity market rally.