Markets Look to Earnings for Direction

STOCK INDEX FUTURES

The indexes edged higher following yesterday’s bounce back from their recent sell-off, led by a rally in tech as a slate of positive economic data lifted sentiment in the markets and boosted a global risk-on rally. ADP payroll figures for October beat out expectations of 32,000 at 42,000 new jobs. The rebound in hiring was focused in education, healthcare, trade, transportation, and utilities, while professional business services, information, and leisure and hospitality all saw employers shed headcounts. ISM services/non-manufacturing PMI rose to 52.4 in October, up from 50 in September and well above expectations of 50.8. The reading reflected the strongest expansion in the services sector since February, as business activity and new orders both rebounded in activity. On the employment side, the index continued to show contraction in employment, although there were no indications of widespread layoffs. The prices index rose to 70, up from 69.4. 11 industries reported growth, while 6 reported contraction, one less than previously.

Market sentiment was also lifted as reports came out that the Supreme Court had grilled the White House’s attorney regarding the administration’s authority to impose global tariffs. Although some justices were cognizant of President Trump’s powers to address foreign affairs.

On the earnings front, investors continue to scrutinize earnings as debates continue on whether or not tech valuations are too high. Chipmaker Qualcomm posted strong earnings and upbeat guidance after the bell yesterday, but its stock fell nearly 3% in premarket trading as investors were disappointed by its intellectual property licensing revenue, which came in below forecasts. Arm shares jumped 6% after the chip designer credited AI demand for a quarterly revenue forecast that topped estimates. Attention will turn to Tesla’s shareholder meeting later this afternoon where a vote is scheduled on its CEO’s pay package, which, if not approved, could see him leave the company. Attention will also be focused on the FAA’s decision to cut 10% of flights at 40 airports due to the shutdown, which has entered its sixth week.

CURRENCY FUTURES

US DOLLAR: The USD index fell as a stronger risk sentiment took hold of currency markets, with the dollar losing ground against the pound, euro, and yen. The dollar slipped in choppy trade Wednesday following the ADP and ISM figures, which sparked a risk-on rally that saw curbed demand for the safe-haven currency. The ADP report showed that US private employers added more jobs than expected in October, while the ISM services PMI rose to an eight-month high. Money markets are pricing a 67% chance of a December rate cut from the Fed. Fed speak remains mixed, and paired with uncertainty over labor market and inflation data, markets will continue to monitor remarks from Fed officials for clues into the Fed’s policy path.

EURO: The euro moved higher on a weaker dollar following the release of underwhelming economic figures out of Germany and the Eurozone. Retail sales across the eurozone slipped in September, falling 0.1% and missing expectations of a 0.2% rise. German industrial production grew less than expected in September, with growth rising 1.3%, helping to negate a 3.7% drop in August, although well below forecasts of a 3.0% rise. The auto industry recorded a 12.3% rise in output, helping to contribute to the overall rise and rebounding from a previous 16.7% drop the month prior. On an annual basis, total industrial output fell 1.6%, following a revised 3.6% drop in August. The data comes on the heels of the Ifo Institute index, which showed that expectations for future business brightened in October. Germany’s government has pledged to unlock as much as 1 trillion euros ($1.149 trillion) in investments for defense and infrastructure, although that spending will not be seen in data until next year. Factory orders rose 1.1% on the month in Germany, up from a 0.4% fall in August. The ECB is experiencing a rare phase of low inflation and stable growth, and with inflation near target and a reduction in downside risks, it is in no hurry to cut rates.

BRITISH POUND: The pound is higher, paring earlier losses following the Bank of England’s decision to hold rates steady, while a narrow vote added to prospects that policy easing could soon be on the horizon. The Monetary Policy Committee, comprised of nine members, voted 5-4 to keep the central bank’s benchmark Bank Rate at 4.0%. A Reuters poll last week had expected a 6-3 vote. The central bank said that “if progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.” This is a notable change from earlier statements that championed a cautious and gradual approach to easing. Policymakers said that CPI inflation has peaked and underlying disinflation is progressing, helped by a still-restrictive policy stance, softer pay growth, and easing services inflation. A subdued economy and weakening labor market are also reinforcing disinflation. However, policymakers will need time to assess how inflation progresses. Governor Andrew Bailey said he felt that overall inflation risks had moved down, although he wanted to assess further data. Focus will now shift to upcoming inflation and jobs data for October in November, which will be pivotal in determining how the bank will move come December. Additionally, the bank will know the extent of tax increases in Finance Minister Rachel Reeves’ November budget.

JAPANESE YEN: The yen moved higher against the dollar following the release of firm wage data that added to speculation the Bank of Japan will tighten policy soon. Nominal wages increased 1.9% in September, up from a downwardly revised 1.3% in August and in line with forecasts. Wage growth continues to fall behind consumer price growth (3.4%). Real wages, adjusted for inflation, fell 1.4% on an annualized basis, marking the ninth straight decline. For the BoJ, the wage growth outlook for 2026 will be critical in determining the timing of the next rate hike. A rise in wage income will help drive sustainable inflation, which will make it easier for the BoJ to return to policy normalization. The yen is nearing past intervention thresholds, and weakness may persist unless the BoJ signals tightening or the government hints at market action. Meanwhile, the BoJ remains patient despite internal calls to raise rates. Household spending data, which could offer leading clues on inflation, will be released Friday.

AUSTRALIAN DOLLAR: The Aussie gained as better-than-expected trade figures lifted sentiment. Trade balance figures showed that Australia’s trade surplus widened in September to 3.94 billion, up from a downwardly revised figure of 1.11 billion in August and surpassing market expectations of AUD 3.85 billion. Exports rose 7.9% month-over-month, rebounding strongly from an 8.7% fall in August. The rebound in exports was driven by a 62.2% surge in non-monetary gold, recovering from a 47.2% plunge in the previous month. Among trading partners, exports to China rose 9.7%, while exports to the United States surged 24.4%. On the monetary policy front, the Reserve Bank of Australia held rates steady and signaled that policy easing will be on hold. Higher inflationary pressures in the economy continue to persist, causing the RBA to revise its forecasts for inflation higher. Money markets are now only placing a 10% chance of a cut in December from the RBA, signaling that its easing cycle may be over as inflationary pressures in the economy begin to materialize.

INTEREST RATE MARKET FUTURES

Yield drifted lower across the curve, recovering slightly from yesterday’s selloff following the release of positive ADP and ISM services PMI data. The Challenger, Gray, and Christmas job cuts report published early this morning showed that US employers announced 153,074 job cuts in October, the highest total for the month since 2002. Meanwhile, seasonal hiring plans were the lowest since the firm started collecting hiring plans data in 2012. Through October, employers have announced 1,099,500 job cuts, the highest year-to-date total since the pandemic, and up 44% from the 761,358 cuts announced in all of 2024. So far this year, the government announced the most layoffs at 307,638, followed by tech at 141,159.

Yesterday’s ISM services data pointed to persistent inflationary pressures in the services sector, a trend that has been worrying FOMC members, making some reluctant to cut rates. The prices index increased to 70 in October from 69.4 in September. The prices index has averaged a reading of 60.06 from 1997 until 2025, reaching an all-time high of 84.50 points in December of 2021 and a record low of 36.10 points in December of 2008.
Dallas Fed President Lorie Logan recently said that she finds it difficult to cut rates in December given the recent trend in services price inflation, which tends to be stickier than other sectors.

The Treasury said it expects to keep its nominal coupon and floating rate note auction sizes steady for at least the next several quarters but is beginning to consider future increases. The Treasury will auction $125 billion in its quarterly refunding next week. This will include $58 billion in three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds. The Treasury said it has begun to preliminarily consider future increases to its nominal and floating rate note auction sizes and is evaluating trends in structural demand and assessing the potential costs and risks of various issuance profiles. The Treasury will vary the size of its bill issuance over the coming quarter based on its needs. It expects to make modest reductions to short-dated bill auction sizes in December, based on corporate and non-withheld tax receipts. It then expects to increase them again by the middle of January 2026, based on expected fiscal outflows.

The spread between the two- and 10-year yields rose to 52.80 bps from 52.20 bps on Wednesday, while the 2-year yield, which reflects interest rate expectations, fell to 3.588%.

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