The United States ADP Employment Change 4-week average rose to 10.3K in January 2024. It was 6.5K in the prior period.
In hindsight, this small rise in January 2024 was an early sign that the labor market was holding up better than expected. That strength kept going through 2024 and 2025. As a result, the Federal Reserve did not cut rates as early as many investors expected. This long stretch of higher rates has shaped the market we trade today.
Shifting Rate Cut Expectations
Now, in February 2026, the story is starting to change. The latest jobs report showed the slowest hiring pace in more than a year. Core inflation has also dropped to 2.3%. Together, these signals suggest the economy may be cooling enough for the Fed to act. The market now prices in a more than 70% chance of the first rate cut by the May meeting.
For interest-rate traders, this points to the start of an easing cycle. We see value in using SOFR futures options to position for a faster pace of cuts than the market currently expects in the second half of the year. The main risk is that economic data suddenly heats up again, which looks unlikely right now.
In equities, this shift creates uncertainty that can be traded with derivatives. Rate cuts often support stocks, but the weaker growth that leads to cuts can also hurt earnings. For that reason, we think buying VIX call options or using collars on major indices like the SPX can be a cost-effective way to protect against a near-term downturn.
We also see opportunities in currency derivatives. The U.S. dollar has been strong for almost two years. As the Fed gets closer to cutting rates, the dollar may weaken against currencies where central banks stay more hawkish. Long-dated options on pairs like EUR/USD could offer leveraged exposure to this trend.
Currency And Volatility Positioning
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