Stocks Join Bonds Higher Amid Bets Fed Will Cut: Markets Wrap

Representative image

More evidence of a slowdown in the US jobs market reinforced bets the Federal Reserve will cut interest rates in its final policy meeting of 2025, driving stocks higher as bond yields fell alongside the dollar.

Almost 350 shares in the S&P 500 rose despite weakness in most megacaps. Nvidia Corp.’s Jensen Huang is unsure whether China would accept its H200 chips should the US relax restrictions. Microsoft Corp. slid 2.5% on a report of lower demand for some artificial-intelligence tools even as the company said aggregate sales quotas for AI products have not been reduced.

Treasuries rose across the curve, sending two-year yields below 3.5%. The greenback saw its worst day since September.

US companies shed payrolls in November by the most since early 2023, adding to concerns about weakening in the labor market. Services activity expanded at a slightly faster pace, while a measure of prices paid dropped to a seven-month low.

Policymakers have been torn as to whether they’ll cut rates for a third straight meeting as they attempt to balance the slowdown in the job market with still-elevated inflation. Investors, however, widely expect the Fed to lower borrowing costs next week.

“The faltering labor market will be the focus for the Fed at their December meeting,” said Jeff Roach at LPL Financial. “Since earlier this year when we started to see a material weakening in the jobs market, I have believed labor demand is weak enough for the Fed to cut, including this month.”

The S&P 500 closed around 6,850, rising for the seventh time in eight sessions. In late hours, Salesforce Inc. gave a solid revenue forecast. Snowflake Inc.’s outlook for operating margin fell short of analysts’ estimates.

The yield on two-year Treasuries fell two basis points to 3.48%. The dollar dropped 0.3%. Bitcoin hovered near $93,000.

“This week’s data is largely confirming what traders already suspected: US data is cooling at the margin, and nothing this week is likely to change the market’s conviction that the Fed is heading towards a December cut,” said Fawad Razaqzada at Forex.com.

Even if ADP had popped higher, the timing works against the dollar, he added.

“This keeps the greenback vulnerable to further downside – particularly against lower-yielders like the yen, where the bond markets are pointing to strength for the currency,” Razaqzada noted.

The market is now pricing a more than 90% likelihood of a 25-basis-point reduction by the Fed at its policy meeting next week, up from around 25% just under two weeks ago, noted Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

“We are positive on quality bonds, specifically high-grade government and investment-grade corporate bonds,” she said. “Medium-duration quality bonds (four to seven years) should deliver mid-single-digit returns from a mix of yield and capital appreciation as the Fed cuts rates.”

Private-sector payrolls decreased by 32,000, according to ADP Research data. The median estimate of economists called for a 10,000 gain.

“This morning’s ADP data confirm what a lot of the doves are saying – it’s more important to focus on a weakening labor market than to worry about inflation,” said Chris Zaccarelli at Northlight Asset Management. “Although there may be some dissents at next week’s Fed meeting, it is a sure thing that a 25 basis-point rate cut will be announced.”

But going forward is where things get more confusing, he noted.

“Our expectation is that the doves will win out and we will see a number of rate cuts next year, but we think they may be more spaced out and potentially less cuts will be made than are currently being forecast, which is why we are bullish into the new year, but more cautious once we arrive in 2026,” he said.

Today’s ADP data keeps a December rate cut thoroughly in play, according to David Russell at TradeStation.

“Main street is hurting as months of uncertainty and tariffs take a toll. AI is supporting parts of the economy, but many small businesses don’t benefit,” he said. “The fact wages aren’t falling suggests this is a crisis of confidence in parts of the economy, and not the result of an actual recession.”

“The message is clear: US job creation has given another sign of stalling,” said Florian Ielpo at Lombard Odier Asset Management.

The latest jobs reading still appears to support the ongoing rally, fueled by a duration effect - lower long-term yields driven down by Fed cut expectations act as an apparent risk-on catalyst for equities, Ielpo noted.

“However, this is only superficial – the key question now is: what will the Fed actually do with this data given such a divided board of voters? Monday’s industry ISM and today’s ADP report are screaming ‘cuts!’ and markets will likely echo this sentiment,” he said.

The modest fall in the ADP payrolls measure in November, coming on the back of a similar message from the Fed’s Beige Book, should be enough to persuade officials to vote for another cut next week, according to Stephen Brown at Capital Economics.

Looking through the month-on-month volatility, however, Brown noted that the broader message from the alternative indicators appears to be that labor market conditions are stable rather than deteriorating markedly.

“Accordingly, the Fed is still likely to accompany a further cut next week with more hawkish messaging about the prospect for future loosening,” he said.

His Capital Economics colleague Thomas Ryan said he expects concerns over softening labor market conditions among the doves on the Federal Open Market Committee to win out next week, resulting in another 25 basis-point cut.

“But in return, the more hawkish members are likely to secure language in the policy statement about the prospect of a pause in the new year,” Ryan noted.

While the most-recent US government report showed a larger-than-expected rise in payrolls, the gain was concentrated in just a few industries. The unemployment rate ticked up to an almost four-year high, and there’s been a steady drumbeat of layoff news from companies.

“Right now, the data argues for additional Fed funds rate cuts. US labor demand is weak, consumer spending is showing early signs of cracking, and upside risks to inflation are fading,” said Elias Haddad at Brown Brothers Harriman & Co.

Before their final policy meeting of the year, Fed officials will get a dated reading on their preferred inflation gauge. On Friday, the September income and spending report — long delayed because of the government shutdown — is due to be released.

The figures will include the personal consumption expenditures price index and a core measure that excludes food and energy. Economists project a third-straight 0.2% increase in the core index. That would keep the year-over-year figure hovering just below 3%, a sign that inflationary pressures are stable, yet sticky.

The soft survey data continue to paint a downbeat picture, but the behavior of consumers and businesses tells a very different story, according to Mark Hackett at Nationwide. That’s why he believes Friday’s income, spending and PCE data will matter far more than what people say in surveys.

“Fundamentally, this still looks like a ‘buy-the-dip’ market: the backdrop is strong, technicals have snapped back and the valuation problem is really confined to mega-cap tech,” he said.