Fed Rate Cut Hopes Fade Following Bumper ADP Report: XTB

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Written by Kathleen Brooks, research director at XTB

The market is increasingly assuming that a U.S. rate cut is some months away.

After another strong data report, this time the March ADP private sector payrolls report, the market is increasingly expecting fewer rate cuts from the Fed this year, with the first rate cut currently on a knife edge between July and September.

The market is currently pricing in a 36% probability that the first-rate cut will be in September, this is up from 14% a month ago.

The market is becoming increasingly less optimistic about the prospect of near-term rate cuts, and this is having an impact across financial markets.

Image: ADP.

The ADP private sector payrolls report was worth watching for a number of reasons. The number of private sector payrolls was stronger than expected at 184k, the market had expected a reading of 150k for March.

This was the strongest reading since July, and the February reading was also revised higher to 155k from 140k. This suggests that the economic resilience in the US as we move through 2024 is leading to a re-acceleration in hiring, just at the wrong time for the Federal Reserve.

The issue for the Fed is that it will be hard to justify cutting rates if employment is rising, which could put upward pressure on wages and core inflation down the line.

The split in ADP payrolls is also interesting. The number of service sector jobs rose by 142k, while the number of goods-producing jobs was higher by 42k.

The number of private sector jobs in the service industry has been accelerating since the start of 2024, whereas goods-producing jobs have remained fairly low and stable. This is a problem because the stickiest part of inflation is in the service sector.

Job growth was strongest in the south and in large companies compared with small ones.

This data comes at an interesting time. We are waiting to hear from Fed chair Powell, who will be speaking about the economic outlook at 5pm London time. Will he make reference to strong labour markets? It may be hard for him not to.

The ADP data does not have a particularly strong correlation with payrolls data; however, it does suggest that we could get another strong payrolls report on Friday. The market is looking for 214k, down from 275k.

However, the strength of hiring in the service sector means that the bias could be to the upside for Friday’s report.

U.S. stocks are expected to extend their decline on Wednesday, and US government bond yields are also higher across the curve.

The 10-year US yield is up 4 basis points, while the 2-year yield is higher by 3 basis points. US 2-year yields are higher by 13 basis points so far this week, which is another sign of tightening financial conditions in the US as the market prices out the prospect of rate cuts from the Fed.