U.S. stocks advanced and bond yields fell as new data revealed an unexpected decline in private sector employment, strengthening investor expectations for a Federal Reserve interest rate cut at its upcoming December meeting. The S&P 500 saw broad gains, marking its seventh rise in eight sessions, as markets interpreted the cooling labor market as a key signal for a policy shift from the central bank.
The report, which showed a loss of 32,000 private payrolls in November against forecasts of a modest gain, sent ripples through financial markets. The probability of a 25-basis-point rate reduction by the Fed next week has now surged to over 90%, a dramatic increase from just under 25% two weeks ago. This shift in sentiment also pushed the U.S. dollar to its weakest performance since September.
Key Takeaways
- U.S. private sector payrolls unexpectedly fell by 32,000 in November, the largest drop since early 2023.
- Market-implied odds of a Federal Reserve rate cut in December have jumped to over 90%.
- The S&P 500 climbed to approximately 6,850, continuing its recent upward trend.
- Treasury yields declined, with the two-year yield dropping below 3.5%, while the U.S. dollar weakened significantly.
Labor Market Shows Signs of Strain
Fresh data from the ADP Research Institute provided the clearest evidence yet of a slowdown in the U.S. jobs market. The reported 32,000 decrease in private payrolls for November starkly contrasted with economists' median estimate, which had predicted a 10,000 gain.
This development has become a central focus for investors and policymakers alike. The report adds to a series of indicators suggesting that the high-interest-rate environment is beginning to weigh on hiring and economic activity. While services activity saw a slight expansion, a separate measure of prices paid by businesses fell to a seven-month low, easing some inflation concerns.
"The faltering labor market will be the focus for the Fed at their December meeting," said Jeff Roach at LPL Financial. He noted that the weakening labor demand appears significant enough to warrant a rate cut from the central bank.
By the Numbers
The S&P 500 closed up 0.3% around 6,850, while the Dow Jones Industrial Average gained 0.9%. The small-cap Russell 2000 Index surged 1.9%, indicating broad market optimism.
Investors Solidify Bets on Fed Action
The market's reaction to the jobs data was swift and decisive. The probability of a 25-basis-point rate reduction at the Fed's final 2025 policy meeting is now overwhelmingly priced in by traders. This marks a significant shift in sentiment over a very short period.
"This week’s data is largely confirming what traders already suspected: US data is cooling at the margin, and nothing this week is likely to change the market’s conviction that the Fed is heading towards a December cut," explained Fawad Razaqzada at Forex.com.
The sentiment was echoed by Chris Zaccarelli at Northlight Asset Management, who stated that the ADP data reinforces the view that it is "more important to focus on a weakening labor market than to worry about inflation." He considers a 25-basis-point cut next week a "sure thing."
"The message is clear: US job creation has given another sign of stalling."
Bonds and Currencies Reflect Policy Pivot
The anticipation of lower borrowing costs drove significant movements in the bond and currency markets. U.S. Treasuries saw gains across the board, pushing yields lower. The yield on the policy-sensitive two-year Treasury note fell two basis points to 3.48%, dipping below the key 3.5% level.
Longer-term bonds also rallied, with the 10-year Treasury yield declining three basis points to 4.06%. This trend reflects investors seeking the safety of government bonds and betting that the peak of the interest rate cycle has passed.
Meanwhile, the U.S. dollar weakened against a basket of major currencies. The Bloomberg Dollar Spot Index fell 0.3%, its largest single-day drop since September. A less aggressive Federal Reserve makes the dollar less attractive to foreign investors seeking higher yields.
What Comes Next?
All eyes are now on the Federal Reserve's final policy meeting of the year. Before then, officials will review the September Personal Consumption Expenditures (PCE) price index, their preferred inflation gauge. Economists expect the core index to show a 0.2% increase, which would keep the annual rate just under 3%, suggesting that inflation remains persistent even as the economy cools.
Analysts Weigh In on Future Path
While the consensus for a December cut is strong, analysts are looking ahead to 2026 with more caution. Some believe the Fed will need to balance its response to a weaker job market with still-elevated inflation, potentially leading to more hawkish messaging even if a cut is delivered.
Stephen Brown at Capital Economics suggested that while the latest data should persuade officials to cut rates, the Fed is likely to accompany the move with "more hawkish messaging about the prospect for future loosening."
Others see the current data as an unambiguous signal for more accommodative policy.
"Right now, the data argues for additional Fed funds rate cuts. US labor demand is weak, consumer spending is showing early signs of cracking, and upside risks to inflation are fading," said Elias Haddad at Brown Brothers Harriman & Co.
This dynamic—a slowing economy prompting rate cuts—is fueling the current stock market rally. As long-term yields fall, equities become more attractive, creating a risk-on environment for investors heading into the end of the year.
