JOLTS, ISM Data on Deck

STOCK INDEX FUTURES

The indexes are mixed, with the S&P little changed, the Nasdaq falling in the red, and the Dow gaining following strong gains yesterday that saw the Dow and S&P rise to new records. Markets remain unfazed by the situation in Venezuela, as it is likely to have little to no impact on capital markets, in part thanks to a seeming lack of potential escalation and the fact that Venezuela’s economy is a non-player in the global marketplace, even with its oil production. ISM Services PMI data for December and the JOLTS Job Openings report set for release later in the morning are likely to add to clues on underlying economic momentum and the health of the labor market.

ADP private payroll figures data showed that the economy added 41,000 jobs in December, below forecasts of 49,000. Now that official government data is back and with December’s nonfarm payrolls report due on Friday, traders largely moved past the data release. Still, it is important to monitor the report for clues on what sectors are hiring and if there has been a potential reversal in sectoral hiring trends. ADP’s report detailed that hiring was led by the education and health services and leisure and hospitality sectors. That is unsurprising given that the healthcare sector has been responsible for most of the hiring in the economy over the past months, while the holiday season likely brought in some hiring for the hospitality sector.

A potential notable event on Friday could be the Supreme Court’s ruling on Trump’s tariffs, for which prediction markets are placing an unfavorable outcome for the Trump administration. Polymarket odds are pricing a 70% chance of an unfavorable ruling for the administration in the case. The Supreme Court announced that it would issue a set of opinions on Friday, though it did not disclose what cases it would be ruling on. This has raised expectations that the administration’s case regarding the legality of the global tariffs imposed by the administration could be on the docket. An unfavorable ruling could lead to volatility in the bond market, as tariffs are expected to lower the national deficit by $3 trillion over the next ten years.

CURRENCY FUTURES

US DOLLAR: The dollar is trading in a tight range ahead of JOLTS Job Openings and ISM’s Services PMI survey out later in the morning. The reports will likely help shape investor positioning ahead of Friday’s report, as the data will offer clues on the direction of underlying economic momentum. Regarding ISM’s Services PMI survey, attention should be focused on the prices index as a leading indicator of inflation trends. Dollar direction is likely to be influenced by the prices index, alongside the headline PMI figure. The dollar found strength on Tuesday, with the USD index hitting a two-week high, as traders sought out the greenback in flight-to-quality longs ahead of upcoming economic data after ISM’s manufacturing PMI survey and S&P Global’s Services PMI survey reflected softening economic momentum. Markets have shrugged off the Venezuela impact and instead have focused on this week’s economic calendar. Friday’s payroll data will be the highlight of the week for markets, as it will offer a solid assessment of the US labor market in a report that should be free from any shutdown-related impacts. Currently, markets are pricing an 18% chance of a rate cut at the January meeting, with a rate cut not fully priced in until the June meeting.

EURO: The euro is little changed against the dollar as currencies trade in a tight range ahead of upcoming data in the US. Overnight, eurozone CPI figures largely came in as expected, reinforcing the view that European Central Bank policy is likely to remain unchanged for quite some time. Prices in the eurozone rose 2.0% on the year in December, while core prices rose 2.3%, which was just below forecasts of 2.4%. Italian CPI inflation figures also matched expectations, with prices rising 1.2% on the year. French and German inflation figures came in below forecast, with a 0.7% year-over-year rise in France, which was below the previous reading and forecasts of a reading of 0.8%. Meanwhile, prices in Germany rose 1.8% year-over-year in December; that is below November’s 2.3% and forecasts for 2.0%. Notably, for Germany, it was the first time the reading fell below the ECB’s 2% target since September 2024. The modest inflation figures in Germany were in part thanks to slowing goods inflation, a decline in energy prices, and slowing food price growth despite sticky services inflation. The euro’s strengthening in 2025 has had a disinflationary effect on prices, mainly tied to imports, in the eurozone, as the stronger currency has made foreign goods cheaper. This week’s inflation figures are unlikely to shape opinions at the European Central Bank for any near-term moves on monetary policy. The ECB is likely to stay on hold for 2026 and most of 2027, as inflation is forecast to hover around the bank’s 2% target, while recent growth projections have been revised higher. Given the seeming divergence between central bank policy, data out of the US this week will serve as the primary catalyst for moves in the euro.

BRITISH POUND: The pound edged lower but traded in a tight range against the dollar as traders await key data out of the US this week in what is to be a relatively quiet week for the sterling. Recent strength in the pound has come from improved investor sentiment in Britain as worries ease about the UK’s fiscal position and hints that the UK is working on a closer relationship with Europe. Consumer credit and mortgage lending data for November, which showed that mortgage approvals fell less than expected and that there was an increase in consumer borrowing, came out on Monday and did little to move the currency, suggesting that traders will be focusing on data out of the US for moves in the sterling. The Bank of England lowered rates by 25 bps last month and is expected to deliver one more rate cut this year, although officials at the bank cautioned that the pace of easing could slow as the bank does not want to jump the gun on inflation. The recent rate cut brought a tight 5-4 vote, with BoE Governor Andrew Bailey offering the tie-breaking vote.  Money markets suggest the next rate cut could come in April or June, with the latter meeting being fully priced in for a cut.

JAPANESE YEN: The yen strengthened against the dollar ahead of upcoming US data, though it was near the 157 level. Rising geopolitical tensions against China have weighed on investor sentiment in Japan after China on Tuesday banned exports of dual-use items to Japan that can be used for military purposes. The move from Beijing is in reaction to an early November remark by Japanese Prime Minister Takaichi about Taiwan. The Bank of Japan’s branch managers’ meeting will take place on Thursday, which will see the central bank release its regional economic report, similar to the Fed’s beige book. BoJ Governor Ueda reiterated that the bank will continue to raise rates if economic projections are met, language that he has used in the past that is largely being shrugged off by traders. However, there is growing confidence that Japan is in a good place to move into a more sustainable, growth-driven economy, but those hopes have done little to support the currency. The cabinet recently approved a 122.3 trillion yen budget, which aims to balance aggressive fiscal spending and debt management by curbing new bond issuance. However, Japan’s public debt is twice the size of the country’s economy, giving the government limited flexibility to implement further stimulus measures. These dynamics continue to present downside pressure against the currency; expectations that the BoJ will raise rates slower and more cautiously than expected have removed some near-term strength.

AUSTRALIAN DOLLAR: The Aussie is little changed against the dollar following a mixed inflation report for November, which showed that consumer prices were unchanged in November, while the annual pace of inflation slowed. Consumer prices rose 3.4% on the year in November, below forecasts for 3.6% and a drop from October’s reading of 3.8%. Trimmed mean CPI, which is a key measure of core inflation for the Reserve Bank of Australia, rose 0.3% in November and 3.2% for the year, staying well above the target 2%. The figures come at a time when traders have been speculating that the Reserve Bank of Australia could soon be raising interest rates as multiple inflationary pressures have become evident in the economy. Capacity utilization, housing demand, facets from GDP data, and other indicators have all recently posted hotter-than-expected readings, leading some at the RBA to signal that an interest rate hike could be on the table soon. The inflation data has shifted market-implied odds of the next rate hike to the halfway point of the year, with markets fully pricing in a rate cut from the RBA at its June meeting. Before the data was released, markets had priced the first rate hike of 2026 to come in either March or May. May is still favorable for a potential rate hike from the bank. Still, the central bank sees the monthly inflation figures as volatile and places greater emphasis on its quarterly inflation report, which is due in late January. A stronger-than-expected Q4 core inflation print is likely to shift rate cut timing odds once again. Building approvals data and some trade data for November are also due for release this week, which could offer some signals on economic momentum in the country. Recent figures showed that Australia’s economy grew 0.4% in the third quarter, up 2.1% from a year earlier.

INTEREST RATE MARKET FUTURES

Yields are lower across the curve in a flattening move, with a wave of buying following the release of ADP’s private payroll figures that showed the economy added 41,000 jobs in December, below forecasts of a gain of 49,000. November’s figures were upwardly revised to a net loss of 29,000 from an earlier reading of a net loss of 32,000. The JOLTS Jobs Openings report and the ISM’s Services PMI survey will both be released at 9:00 a.m. CT. Both releases are likely to bring moderate movement in yields as they will help signal directional momentum on the economy and the labor market. Government data will serve as the main catalyst for price direction in the bonds throughout Q1, as speculation over the timing and pace of interest rate cuts from the Fed remains a key factor in Treasury yields.

The most recent JOLTS report (for October) showed a slight uptick in layoffs as a percentage of all jobs, while layoffs remained below pre-COVID levels. It will be important to see how November’s JOLTS report details the number of layoffs that have happened during the month, as the economy is in a perceived “low-hire, low-fire” mode. Any signals from the JOLTS report that the economy is leaning in a direction of increased firing/layoffs will likely be acknowledged by officials at the Fed in their assessment of labor market conditions. If current conditions are largely maintained, there is a case to believe that the Fed may hold out on any rate cuts in the coming months and stick to just one cut in 2026.

Regarding ISM’s Services PMI survey, attention should be focused on the prices index as a leading indicator regarding inflation trends. Previous surveys have shown intensified price pressures since April, with companies reporting that tariffs are having a direct impact on prices. However, the headline figure will still serve as a viable measure on economic activity in the US, given that it is largely a services-based economy. ISM’s Manufacturing PMI survey reported a shrinking factory activity in the US for the tenth month in a row, while price pressures stabilized but remained elevated. Recent data and PMI surveys have suggested that price pressures are declining, yet elevated. November’s CPI inflation report did little to reassure that trend given the downward bias of the data collection efforts, leading to more importance on PMI data and the upcoming December CPI report.

December’s nonfarm payrolls report on Friday should be free from any shutdown-related impacts, giving markets a clear look into the health of the labor market. Aside from the volatile nonfarm payrolls figures that have been published and a seemingly misleading jump in the unemployment rate (rounded up to 4.6%), the state of the labor market appears to be cooling, but not collapsing, a key distinction that will be important to monitor regarding Fed policy.

The question regarding what is a cooling labor market and one that is cooling faster than expected remains at the center of monetary policy debate and signals on how the labor market is walking that line will likely serve as the best indicator on future Fed moves. Job growth is likely to remain sluggish for the economy, a notion that policymakers understand and fully expect as labor supply has been reduced alongside a drop in demand for labor as well. That leaves the question about the level at which job growth should be maintained to preserve a solid labor market in the air.

Fed Funds futures are favorable to a rate cut from the Fed in April or June, followed by another reduction in September or October. The Fed’s dot plot revealed that policymakers are almost evenly split on how monetary policy should proceed in 2026, but President Trump’s Fed nominee is expected to support further easing in the economy. The president said he would be announcing his nominee for the Fed in January, so markets will continue to keep an ear open for the announcement.

The spread between the two- and 10-year yields fell to a one-week low of 67.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.447%.

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