TD Securities expects that US job data will be below consensus predictions for both ADP employment and ISM services. They predict a small bull steepening as markets await the delayed Non-Farm Payroll (NFP) report. The analysis indicates a drop in ISM services, especially in employment and new orders.
On Wednesday, the US Treasury’s quarterly refunding is anticipated, with auction sizes likely staying the same. Future guidance suggests these sizes will remain steady over the next few quarters. ISM services are projected to fall to 52.8 from a prior 53.8, showing a correction from December’s unexpected rise.
Focus Areas in Upcoming ISM Services Release
Key attention will be on the decreases in employment and new orders in the upcoming release. This article was generated with AI and reviewed by an editor. The FXStreet Insights Team, made up of selected journalists, gathers insights from market experts, enhanced by analysis from analysts.
With job data forecasted to be weak, we are looking for chances in interest rate derivatives. The market now sees a higher chance of a Fed rate cut by mid-year, marking a significant change from the sentiment just a month ago. This indicates that positioning through options on SOFR futures could take advantage of a more dovish policy shift.
The recent Chicago PMI for January, which dropped to 48.1, already indicated a slowdown in business activity, supporting a weaker-than-expected ISM services report. This follows a trend we noticed in the last quarter of 2025, where hiring momentum began to decline. Thus, we consider any temporary strength in the dollar as a chance to sell.
Opportunities and Market Strategies
The expected bull steepening in the Treasury curve presents a clear opportunity in derivatives. We are exploring positions that benefit from falling long-term yields compared to short-term yields, such as a long 10-year against short 2-year Treasury futures spread. This strategy is backed by historical trends where the curve steepens before a central bank easing cycle.
As we saw during similar slowdowns in 2025, signs of economic cooling can raise market volatility. Therefore, we are looking to buy call options on the VIX index as an affordable way to hedge against a potential stock market decline in the coming weeks. A weaker Non-Farm Payroll report, when released, would likely be the main trigger for such a shift.
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