The Dow Jones Industrial Average jumped by 420 points, fueled by hope that the Federal Reserve might cut interest rates in December. This boost came after earlier drops tied to poor ADP jobs data and lower sales expectations in Microsoft’s AI divisions. The ADP Employment Change reported a loss of 32,000 jobs in November, a stark contrast to a gain of 47,000 jobs in the month before and a projected gain of 5,000. The ADP numbers can be inconsistent and often don’t match official reports, which are delayed due to a US government funding shutdown.

The FedWatch Tool

According to the CME’s FedWatch Tool, there is nearly a 90% chance that the Federal Reserve will cut interest rates in December. However, there’s still an 80% chance that the rate cut could be delayed until January, showing market uncertainty amid declining job data in the US. US Industrial Production increased by just 0.1% in September, while earlier figures were revised down to -0.3%. S&P Global noted that business expectations are falling, with its Composite PMI dipping from 54.8 to 54.2. Microsoft’s AI divisions have reduced their sales forecasts due to weak demand. This unusual downgrade caused Microsoft shares to drop by 2.28%. Although the shares recovered slightly, they still ended the day lower. With markets rising on bad economic news, there appears to be a short-term opportunity. The nearly 90% chance of a Fed rate cut on December 10th suggests we should consider buying short-dated call options on major indices like SPY and QQQ. This strategy aligns with the “bad news is good news” theme, as investors bet on rising equities due to the anticipation of lower interest rates.

Impact of Labor Market Data

The struggling labor market data from ADP is supported by other recent statistics, reinforcing the case for a rate cut. Notably, initial jobless claims have been climbing over the past month, reaching a 10-month high of 252,000. We experienced a similar situation in late 2018 when concerns about a slowdown prompted the Fed to shift away from tightening, leading to a significant market rally. However, the upcoming Federal Reserve meeting presents a risk for volatility, so we should prepare for possible market swings. The VIX, which measures expected market volatility, shows a steepening futures curve for January, signaling that traders are anticipating turbulence after the announcement. A straddle on the SPY could be a good strategy here, as it would profit from a significant price change in either direction following the Fed’s decision. The decline in Microsoft’s AI sales is a concerning signal for the tech sector, which has driven the market’s gains this year. This isn’t happening in isolation; recent reports show that enterprise spending on experimental tech for the fourth quarter of 2025 has decreased by 15% compared to the previous quarter. Therefore, it might be wise to consider buying put options on the QQQ ETF or other AI-focused stocks to hedge against a potential downturn in tech. In conclusion, it’s important to remember that the Fed typically cuts rates only when the economy is genuinely struggling. While the market rejoices over the possibility of a cut now, the underlying economic weaknesses could ultimately impact corporate profits and investor confidence. This suggests that any rally from a rate cut could be temporary, so it’s prudent to be ready to take profits quickly and possibly adopt more defensive or bearish positions for early 2026. Create your live VT Markets account and start trading now.

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