Yields Lower on Weak ADP Labor Data

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as the weak ADP labor data spurs a risk-off sentiment, sending yields down. Bond markets remain mixed amid warnings about a potential U.S. economic slowdown stemming from tariffs and ahead of U.S. labor data.

Official nonfarm payroll data will be released Friday; investors will be awaiting the report for clues on the Fed’s future monetary policy. A slowing labor market will add to the probability of a Fed rate cut. Markets are expecting 50 bps of easing this year from the Fed, with the first rate cut coming at the September meeting.

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. Most of the selling in the bond market recently has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

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. 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.

The 10-year Treasury yield is 4.40%, and the 30-year yield is hovering around 4.92%. The spread between the two- and 10-year yields is 48 bps.

CURRENCY FUTURES

The USD index fell against most major currencies 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.

Euro futures are higher on dollar weakness. Yesterday’s Eurozone CPI reading was bearish for the euro which saw inflation grow 1.9% in May on an annualized basis, below expectations and the European Central Bank’s target of 2.0%. 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. The European Central Bank is now set to cut its benchmark rate on Thursday to 2.0%, a move investors believe could be one of the final reductions in this cycle, unless a recession threatens the eurozone economy.

British pound futures are little changed. 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.

Yen futures edged higher on dollar weakness as traders remain cautious over US labor data. 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. Investors now await upcoming labor market and household spending data due later this week for further clues on the domestic economic outlook.

Australian dollar futures are higher despite weaker-than-expected GDP figures for the country. 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.

STOCK INDEX FUTURES

Stock index futures dropped sharply after ADP nonfarm payroll employment change data showed only 37,000 new hires, sharply lower than expectations of 110,000 and below last month’s reading of 60,000.

JOLTS job openings report showed job openings for April rose by 191,000 to 7.391 million. Data for March was revised to 7.200 million open positions instead of the previous 7.192 million. Layoffs also rose by 196,000, the biggest rise in nine months, but remain relatively low by historical standards.

Factory orders dropped sharply in April, as the boost from front-loading of purchases ahead of tariffs faded. Data from the Commerce Department’s Census Bureau showed a 3.7% fall after an unrevised 3.4% jump in March.

Services PMI, ISM non-manufacturing PMI, and prices data for the month of May are due at 8:45 a.m. CT. Services PMI is expected at 52.3. Thursday will see continuing jobless claims and initial jobless claims, as well as trade balance figures for April, which will likely show a sharp drop in imports. On Friday, official nonfarm payroll figures, the unemployment rate, and average hourly earnings data for the month of May will finish the week.

The Organization for Economic Co-operation and Development on Tuesday said the global economy was on course to slow from 3.3% last year to 2.9% in 2025 and 2026, trimming March estimates for growth of 3.1% this year and 3.0% next year.

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.

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