Traders have even greater expectations for a December Fed rate cut after seeing a historically unreliable jobs report

By Vivien Lou Chen

Data released on Wednesday showed private-sector jobs unexpectedly falling in September, raising expectations for preemptive-style interest-rate cuts in both October and December.

Wednesday's shockingly disappointing private-sector jobs report for September was taken by investors and traders as another sign of a substantially deteriorating U.S. labor market that reinforces the need for two more quarter-point interest-rate cuts from the Federal Reserve before year-end.

ADP, the nation's largest processor of payroll checks, reported that 32,000 jobs were culled last month, in contrast to the gain of 45,000 that had been expected by economists polled by the Wall Street Journal. With the U.S. government now partially shut down, ADP's data, often seen as an unreliable gauge of the official Bureau of Labor Statistics nonfarm payrolls report that is usually released a few days later, took on greater significance. Read: The U.S. federal government just shut down. Here's what it means for you and your money.The BLS's September release is no longer on the table for Friday because of the shutdown. So ADP's data was enough to trigger a bond-market rally that pushed 2- through 30-year yields lower on the day, and to cause the dollar DXY to weaken against a basket of six other major currencies.

Meanwhile, all three major U.S. stock indexes DJIA SPX COMP finished higher, supported by hopes that the shutdown will be brief and have a minimal impact on the economy. The Dow and S&P respectively climbed to record closing highs of 46,441.10 and 6,711.20. The takeaway from the initial reaction of financial-market participants is that the labor-market picture is getting worse even though economic growth is holding up, as demonstrated by last week's upward revision of second-quarter GDP to 3.8%, according to strategist Will Compernolle of FHN Financial in Chicago. This caused investors and traders to position for more preemptive-style Fed rate cuts for the rest of 2025 that are designed to offset labor-market weakness and keep the economy chugging along, he said. In September, the BLS reported that the economy created 911,000 fewer jobs than initially reported for the 12-month period that ended in March.Two things made Wednesday's ADP report different than usual, he said. "The first is that we are not going to get the BLS data on Friday. The second is that because BLS revisions have been quite substantial recently, maybe the ADP report's credibility has gone up a little."Via phone, Compernolle added that the lack of key data releases in October due to the shutdown is unlikely to change the Federal Reserve's general thinking about interest rates until after this month. "The Fed has a pretty good sense of where things are now. So if we don't get any data before the Oct. 28-29 meeting, officials will still feel comfortable cutting by 25 basis points this month. After that, disruptions from the shutdown could cause abrupt changes in the employment picture and this data could be distorted if this goes on for a month. And it could complicate what the Fed wants to do in December and onward." Wednesday's decline in most Treasury yields was led by shorter-term rates. The policy-sensitive 2-year yield BX:TMUBMUSD02Y, which is tied to expectations for Fed policy, fell 6.1 basis points to 3.54% or the lowest level in two weeks.

Meanwhile, fed-funds futures traders placed a 99% chance of a quarter-point Fed rate cut later this month and removed the likelihood of no action, according to the CME FedWatch Tool. They also saw an 86.7% chance of another quarter-point rate cut in December, up from 77.3% a day ago. The fed-funds rate target currently sits between 4% and 4.25%, after Fed officials cut rates by a quarter-point increment in September. "The deeply negative ADP reading of -32k signals severe labor market contraction," said Nadir Belbarka, a Dubai-based analyst at XMArabia. In an email, Belbarka wrote that the unexpected job loss figure from ADP's data was "far worse than anticipated" and caused financial-market reactions that were being exacerbated by falling Treasury yields.

-Vivien Lou Chen

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10-01-25 1612ET