US Markets Rally for 2nd Day: Weak Payrolls Data Fuels Fed Rate Cut Hopes!

US stock markets continued their recovery, with major indices closing higher for the second day in a row. This upward momentum was largely driven by economic data that increased the likelihood of the Federal Reserve cutting interest rates at its upcoming meeting.

The Dow Jones Industrial Average recorded a substantial gain, ending the day over 400 points higher and near its peak. The S&P 500 and Nasdaq Composite also finished in positive territory, though they did not match the Dow's performance. Within the 'Magnificent Seven' group of large-cap technology stocks, most constituents saw declines, with Alphabet being an exception. Microsoft experienced a notable drop of 2.5%, reportedly due to softer-than-expected demand for some of its artificial intelligence products, a claim the company has since refuted.

Key Economic Data

• Private Payrolls: The ADP National Employment Report revealed a surprising contraction of 32,000 jobs in November. This figure was significantly below market expectations, which ranged from job additions of 10,000 to 40,000. This marks the fourth instance of negative private payroll growth in the past six months, signaling potential cooling in the labor market.
• Services Sector Strength: In contrast to the labor market data, the US services sector demonstrated resilience. The Services Purchasing Managers' Index (PMI) for November came in at 52.6, representing the highest reading in nine months. A PMI reading above 50 indicates expansion in the sector.
• Inflationary Pressures: Data indicated that prices paid for services and materials experienced the slowest rate of growth in seven months, suggesting easing inflationary pressures.
• Retail Performance: The retail industry showed robust signs, with apparel manufacturer American Eagle notably jumping 15% after reporting earnings that surpassed expectations. The company also elevated its full-year forecast, citing a strong start to the holiday shopping season.

Federal Reserve Outlook

• Rate Cut Probability: According to CME's FedWatch tool, the probability of the Federal Open Market Committee (FOMC) implementing a rate cut at its final meeting of the year stands at 89%. While a cut is widely anticipated, many experts predict it will be a 'hawkish' cut, implying the Fed might signal future tightening or a slower pace of easing.
• Economic Projections: This upcoming FOMC meeting is also significant as the central bank is expected to release its economic projections for 2026, offering insights into its long-term outlook.

Currency and Commodity Markets

• US Dollar Index: The US Dollar Index experienced its largest decline since September, falling below the 99 mark. This depreciation is attributed to increased hopes of a Fed rate cut and the concurrent rally in equity markets.
• Gold and Silver: Gold prices remained elevated, trading above $4,200 per ounce. Silver prices also held steady, trading near its record high levels around $60.

Upcoming Economic Reports

• Key macroeconomic data points scheduled for release later in the evening include the US Trade Deficit figures and initial jobless claims for the past week.

Impact

• The positive sentiment from the US markets and the anticipation of a Fed rate cut could translate into a more optimistic outlook for global equities, potentially benefiting emerging markets like India. However, the mixed economic signals also present a degree of uncertainty. Investors will closely watch for any further signs of labor market weakness versus ongoing service sector strength. An impact rating of 7 reflects the significant influence of US economic news on global markets.

Difficult Terms Explained

• ADP (Automatic Data Processing): A company that provides payroll, benefits administration, and human resources services. Its monthly report on private payrolls is a closely watched economic indicator.
• PMI (Purchasing Managers' Index): An economic indicator derived from monthly surveys of private sector companies across various industries. A reading above 50 indicates economic expansion, while a reading below 50 indicates contraction.
• FOMC (Federal Open Market Committee): The primary monetary policymaking body of the U.S. Federal Reserve System.
• Hawkish Cut: In monetary policy, a 'hawkish' stance typically refers to policies aimed at controlling inflation, often by raising interest rates. A 'hawkish cut' is an unusual term but implies a rate cut that is accompanied by signals or policies that suggest a potential for future rate hikes or a more aggressive approach to inflation control, making the cut less dovish than expected.
• US Dollar Index: An index measuring the value of the United States dollar relative to a basket of six major world currencies.