Stocks Rally as Weak US Jobs News Reinforces Fed Rate Cut Hopes

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +0.34%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.49%.  December E-mini S&P futures (ESZ25) rose +0.30%, and December E-mini Nasdaq futures (NQZ25) rose +0.42%.

Stock indexes recovered from early losses on Wednesday and rallied, with the S&P 500 and Nasdaq 100 posting new all-time highs, and the Dow Jones Industrial Average reaching a one-week high.  Stock indexes rallied on Wednesday after the September ADP employment change report unexpectedly contracted for a second consecutive month, which knocked the 10-year T-note yield -5 bp to a 1.5-week low.  Signs of a weaker labor market also boosted the chances of a Fed rate cut at the October 28-29 FOMC meeting to 100%, according to swaps markets.

Stocks also found support on Wednesday after the Sep ISM manufacturing index rose more than expected to a 7-month high.  In addition, strength in chipmakers supported gains in the broader market, and pharmaceutical stocks rose for a second day on hopes that Pfizer's deal with the US government, which gives it a three-year reprieve from pharmaceutical tariffs, will set a path for other pharmaceutical makers to follow.

Stocks initially moved lower on Wednesday due to the US government shutdown, following lawmakers' failure to pass a continuing resolution to fund the government.  The dollar index fell to a one-week low on Wednesday, and gold prices climbed to a record high as the government shutdown sparked a risk-off sentiment in asset markets.  The shutdown also means a delay in government reports, including Thursday's weekly jobless claims report and Friday's monthly payroll report.  A prolonged shutdown could also delay the government's inflation data, scheduled for release on October 15. 

US MBA mortgage applications fell -12.7% in the week ended September 26, with the purchase mortgage sub-index down -1.0% and the refinancing sub-index down -20.6%.  The average 30-year fixed rate mortgage rose +12 bp to 6.46% from 6.34% in the prior week.

The US Sep ADP employment change unexpectedly fell -32,000, weaker than expectations of a +51,000 increase and the largest decline in 2.5 years.  Also, Aug was revised lower to -3,000 from the previously reported +54,000.

The US Sep ISM manufacturing index rose +0.4 to a 7-month high of 49.1, stronger than expectations of 49.0. The Sep ISM prices paid sub-index fell -1.8 to an 8-month low of 61.9, weaker than expectations of 62.7.

The White House warned last Wednesday that a government shutdown would trigger widespread dismissals of employees in government programs that don't align with President Trump's priorities.  Bloomberg Economics estimates that 640,000 federal workers will be furloughed during a shutdown, which would expand jobless claims and push the unemployment rate up to 4.7%.

Rising corporate earnings expectations are a bullish backdrop for stocks.  According to Bloomberg Intelligence, more than 22% of companies in the S&P 500 provided guidance for their Q3 earnings results that are expected to beat analysts' expectations, the highest in a year.  Also, S&P companies are expected to post +6.9% earnings growth in Q3, up from +6.7% as of the end of May. 

The markets are pricing in a 100% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29. 

Market focus this week will be on any new trade or tariff news. On Thursday, if the US government reopens, weekly initial unemployment claims are expected to increase by +7,000 to 225,000.  Also, Aug factory orders are expected to increase by +1.4% m/m.  On Friday, if the US government reopens, Sep nonfarm payrolls are expected to increase by +51,000, and the Sep unemployment rate is expected to remain unchanged at 4.3%.  Also, Sep average hourly earnings are expected to increase by +0.3% m/m and +3.7% y/y.  Finally, the Sep ISM services index is expected to slip -0.2 to 51.8.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 climbed to a new record high and closed up +0.94%.  China's Shanghai Composite did not trade and is closed for the week-long Lunar New Year holiday.  Japan's Nikkei Stock 225 fell to a 2.5-week low and closed down -0.85%.

Interest Rates

December 10-year T-notes (ZNZ5) on Wednesday closed up +11 ticks.  The 10-year T-note yield fell -4.6 bp to 4.104%.  Dec T-notes climbed to a 1-week high on Wednesday, and the 10-year T-note yield fell to a 1.5-week low of 4.085%.  T-notes rallied on Wednesday on signs of weakness in the US labor market after the Sep ADP employment change unexpectedly declined for a second month. The shutdown of the US government also boosted safe-haven demand for T-notes.  An easing of price pressures also supported T-notes after the Sep ISM prices paid sub-index fell more than expected to an 8-month low.

European government bond yields on Wednesday were mixed.  The 10-year German bund yield rose +0.2 bp at 2.713%. The 10-year UK gilt yield fell -0.3 bp to 4.696%.

The Eurozone Sep S&P manufacturing PMI was revised upward by +0.3 to 49.8 from the previously reported 49.5.

Eurozone Sep CPI rose +2.2% y/y from +2.0% y/y in Aug, right on expectations.  Sep core CPI was unchanged from Aug at +2.3% y/y, right on expectations.

Swaps are discounting a 1% chance for a -25 bp rate cut by the ECB at its next policy meeting on October 30.

US Stock Movers

Pharmaceutical stocks rallied for a second consecutive day on Wednesday, in hopes that Pfizer's deal with the US government, which grants it a three-year reprieve from pharmaceutical tariffs, will set a path for other pharmaceutical makers to follow.  As a result, AstraZeneca Plc (AZN) closed up more than +9% to lead gainers in the Nasdaq 100, and Eli Lilly (LLY) closed up more than +8%.  Also, Merck & Co. (MRK) closed up more than +7% to lead gainers in the Dow Jones Industrials.  In addition, Regeneron Pharmaceuticals (REGN), Pfizer (PFE), and Moderna (MRNA) closed up more than +6%, and Biogen (BIIB), Amgen (AMGN), and Bristol-Myers Squibb (BMY) closed up more than +5%. 

Chip makers and AI-infrastructure stocks moved higher on Wednesday, a supportive factor for the broader market.  Super Micro Computer (SMCI) closed up more than +9%, and Micron Technology (MU) closed up more than +8%.  Also, Intel (INTC) closed up more than +7%, and Applied Materials (AMAT), Lam Research (LRCX), and ARM Holdings Plc (ARM) closed up more than +6%.  In addition, KLA Corp (KLAC) closed up more than +4%, and ASML Holding NV (ASML) closed up more than +3%. 

Cryptocurrency-exposed stocks are climbing today, with the price of Bitcoin up more than +2% at a 1.5-week high.  As a result, Coinbase Global (COIN), Galaxy Digital (GLXY), MARA Holdings (MARA), and Strategy (MSTR) closed up more than +2%.   

Lithium Americas (LAC) closed up more than +23% after Secretary of Energy Wright told Bloomberg TV that the US government agreed to acquire a stake in the company.

AES Corp (AES) closed up more than +16% to lead gainers in the S&P 500 on news that BlackRock's Global Infrastructure Partners LP is in advanced talks to acquire the company. 

Nike (NKE) closed up more than +6% after reporting Q1 revenue of $11.72 billion, stronger than the consensus of $11.02 billion. 

Carvana (CVNA) closed up more than +5% after Jeffries upgraded the stock to buy from hold with a price target of $475. 

Samsara Inc (IOT) closed up more than +2% after Evercore ISI upgraded the stock to outperform from in line with a price target of $50.

Corteva (CTVA) closed down more than -9% to lead losers in the S&P 500 after saying it plans to split its seed and pesticide businesses into separate companies.

MercadoLibre (MELI) closed down more than 8% to lead losers in the Nasdaq 100 on concerns over future sales after rival Amazon Brazil said it will waive all logistics fees, including inbound, storage, and last-mile fees for retail sellers, effectively making its marketplace free through the peak holiday season.

Doximity (DOCS) closed down more than -3% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $64. 

Grocery retailers declined on Wednesday after Amazon.com announced the launch of a new private-label food brand, featuring more than 1,000 items. As a result, Dollar Tree (DLTR) closed down more than -4% and Dollar General (DG) closed down more than -3%.  Also, BJ's Wholesale Club Holdings (BJ) closed down more than -2%, and Kroger (KR) and Walmart (WMT) closed down more than -1%. 

GE Vernova (GEV) closed down more than -1% after RBC Capital Markets downgraded the stock to sector perform from outperform. 

Earnings Reports(10/2/2025)

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