SIFs Await Friday’s Labor Report

STOCK INDEX FUTURES

Stock index futures initially dropped after weekly initial jobless claims data showed an uptick in unemployment claims, though they have picked up strength following the report. Weekly unemployment claims were 247,000, a rise over last week’s 239,000 and higher than expectations of 236,000. Trade balance figures for April showed exports grew by roughly $10 billion while imports dropped by $68 billion.

ADP nonfarm payroll employment change data Wednesday showed only 37,000 new hires in May, sharply lower than expectations of 110,000 and below April’s 60,000. ISM non-manufacturing PMI fell to 49.9 in May, showing a contraction in services activity, a sector that makes up two thirds of the US economy. Respondents in the survey reported difficulty in forecasting and planning due to tariff uncertainty, citing efforts to delay or minimize ordering until impacts become clearer. In addition, the ISM’s measure of prices paid for services inputs rose to 68.7, the highest level since November 2022, from 65.1 in April.

The JOLTS job openings report showed job openings for April rose by 191,000 to 7.391 million. Layoffs also rose by 196,000, the biggest rise in nine months, but remain relatively low by historical standards. Investors now await tomorrows highly anticipated nonfarm payroll report for the month of May, due at 7:30 a.m. CT. Payrolls are expected to increase by 127,000 in what will be the most telling data of how the labor market has responded to the post-tariff economy.

Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 22 times their expected earnings over the next 12 months, as of May 30, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.

US and EU trade representatives on Wednesday said that trade talks have advanced quickly, with both sides citing constructive progress. Meanwhile, Canadian Prime Minister Mike Carney said negotiations continued Wednesday, although Canada is prepared to strike back against the US with reprisals if talks fail.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve in response to weekly initial jobless claims data, though prices appear to be losing strength.

Yields were down across the curve Wednesday as the weak ADP labor report and services sector data spurred a risk-off sentiment, sending investors over to the bond market. Bond markets remain mixed amid warnings about a potential US economic slowdown stemming from tariffs and ahead of US labor data.

The Fed reported in its Beige Book on Wednesday that US economic activity has declined and that tariffs have put upward pressure on prices. The Fed said the economic outlook for the US remains slightly pessimistic and uncertain, unchanged relative to its previous report. In January, all 12 Fed districts reported economic growth; the latest report showed just three did, while half reported economic declines. Meanwhile, most districts reported employment as “flat.” The report suggests that both inflation and the labor market are deteriorating to some degree.

Official nonfarm payroll data will be released Friday at 7:30 a.m. CT; economists are expecting a reading of 127,000 for May. Friday’s report will offer clues on the Fed’s future monetary policy; a slowing labor market will add to the probability of a Fed rate cut. However, strong labor data will reinforce the Fed’s wait-and-see approach to monetary policy while the larger inflation picture plays out. Markets are expecting 50 bps of easing this year from the Fed, with the first rate cut coming at the September meeting.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. The Congressional Budget Office on Wednesday said the proposed tax cut bill will add about $2.4 trillion to the existing $36.2 trillion debt pile. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable. Recent trade policies, combined with the fiscal picture of the US debt, have caused worries in bond markets across the globe, causing investors to demand higher yields on bonds.

The 10-year Treasury yield is 4.34%, and the 30-year yield is hovering around 4.85%. The spread between the two- and 10-year yields fell to 47 bps from 48 bps Wednesday.

CURRENCY FUTURES

The USD index fell against most major currencies as worries over the labor market grew following an increase in weekly initial jobless claims. The dollar fell Wednesday on weak labor data from the ADP nonfarm payroll report, which showed a sharp drop in employment change and the weakest hiring pace since March 2023. The dollar’s near-term outlook will be heavily influenced by Friday’s jobs report and developments in trade news.

Euro futures are little changed after the European Central Bank cut its benchmark interest rate by 25 bps to 2.00%, a response to slowing inflation and threats from President Trump’s tariffs on the region’s growth. German factory orders unexpectedly rose in April; factory orders grew +0.6% on the month, exceeding expectations of a -1.5% contraction. Stronger demand at home offset weaker overseas demand, as domestic orders rose 2.2% on the month in April, while foreign orders declined 0.3%. Services PMI data for the month of May showed a reading of 49.7, above expectations of 48.9, but still lower than last month’s reading of 50.1, suggesting that services activity for the trade bloc has contracted slightly, in line with the US.

British pound futures are higher, supported by a weaker dollar. Construction PMI data for the month of May came in just above expectations at 47.9 and higher than the previous reading of 46.6, indicating construction activity shrunk at a smaller pace in May than in April. Services PMI in the UK for May was 50.9, beating estimates of 50.2 and a step above last month’s figure of 49.0, showing a slight recovery of services activity in the region. The Bank of England’s governor, Andrew Bailey, said Tuesday that the bank will continue to cut rates, but the extent to which and the timing remain in question. Markets are pricing in two interest rate cuts this year, with the base rate expected to land at 3.75%.

Yen futures are lower as data showed a fourth consecutive monthly decline in real wages in April. Inflation in the country has continued to outpace nominal wage growth. This trend has heightened concerns about Japan’s economic outlook, particularly amid growing global uncertainty driven by rising US tariffs. The weak wage figures also complicate the Bank of Japan’s efforts to move toward policy normalization. Bank of Japan Governor Kazuo Ueda said that interest rate hikes will be on hold until economic and inflation forecasts are met. Ueda also noted that Japan’s economy is in a moderate recovery phase, supported by strong corporate earnings and solid business sentiment, though some pockets of weakness persist. Household spending figures are due at 6:30 p.m. CT tonight.

Australian dollar futures are higher, supported by dollar weakness. New trade balance data showed a drop in exports and a rise in imports for the month of April. Exports shrank -2.4% month-over-month while imports grew 1.1%. GDP grew 0.2% quarter-on-quarter in Q1 2025, down from 0.6% and below the forecasted 0.4%. Marking its slowest pace in three quarters, while annual GDP rose 1.3%, short of the 1.5% estimate. The lower-than-expected reading supports the Reserve Bank of Australia’s latest meeting minutes, which suggested the bank will be ready to deliver more rate cuts to counter weak economic growth.

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