The US ADP employment figures for August showed an increase of just 54,000 jobs, falling short of the expected 65,000. In contrast, the ISM services PMI for August came in at 52.0, which was better than the forecast of 51.0. The S&P Global final services PMI for September recorded 54.5, down from the preliminary 55.4. Initial jobless claims in the US hit 237,000, above the anticipated 230,000. Additionally, US Q2 unit labor costs rose by 1.0%, slightly lower than the forecasted 1.2%. US oil inventories rose by 2,415,000 barrels, despite a forecasted decrease of 2,031,000. Canada’s trade balance for July showed a deficit of 4.94 billion, wider than the expected 4.75 billion. The US trade balance for July reflected a deficit of 78.3 billion, larger than the projected 75.7 billion. In financial markets, gold prices dropped by $8 to $3,550, while WTI crude oil fell by 71 cents to $63.26. The S&P 500 gained 53 points to reach 6,501, marking a record high. US 10-year Treasury yields decreased by 4.6 basis points to 4.16%. The US dollar remained strong, particularly against the NZD, even though recent declines in USD/JPY were offset. The market appears calm as investors await the upcoming non-farm payrolls report.

Fed Policy and Market Reactions

The market suggests confidence in a soft landing, highlighted by the S&P 500 reaching a new highest point at 6,501. This scenario of “middling growth” is beneficial for stocks, allowing the Federal Reserve to keep gradually reducing interest rates. Traders can take advantage of this environment by selling puts to earn premium, as they believe the market’s support level is sturdy for now. Fed policy remains a key focus, with officials affirming plans for gradual rate cuts. This marks a significant shift from the aggressive interest rate increases implemented throughout 2023 to tackle inflation, which peaked above 9%. The drop in 10-year yields to 4.16% reflects this shift, making Treasury call options, which benefit from lower rates, appealing. Labor market data is crucial, with ADP employment at just 54,000 and jobless claims rising to 237,000. This indicates a clear cooling compared to last year’s tight job market, where job growth was consistently over 150,000 and claims were lower. This slowdown allows the Fed to ease policies without the fear of reigniting wage pressures.

Market Sentiment and Economic Indicators

Despite mixed data, there is little concern in the market ahead of the major payrolls report tomorrow. Volatility remains low, similar to periods in 2024 when the VIX often traded below 15, making protective options more affordable. A surprise in the jobs number could trigger a sharp market movement, so buying straddles or strangles is a cost-effective way to potentially profit from increased volatility. The US dollar is gaining strength even as yields decline, indicating that the US economy is outperforming other regions. The unexpected increase in oil inventories, which pushed crude prices down to $63, highlights weak global demand. This context makes holding long USD positions against weaker currencies like the NZD sensible, while the outlook for oil remains negative. Create your live VT Markets account and start trading now.

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