What’s happening: Weak US ADP employment data (44k, well below expectations) reinforced the market’s already-building conviction that the Fed has room to hold rates, a narrative driven primarily by growing optimism that the Strait of Hormuz could reopen soon and ease energy-driven inflation risk.
Why it matters: The ADP report didn’t create this dovish shift, it just added to an existing case. September hike odds had already retreated sharply over the prior two days on lower oil prices alone, and Minneapolis Fed’s Kashkari’s pushback for immediate tightening found little support from markets.
Why the Dollar’s Rebound Attempt Faded
The Dollar attempted to recover early in Wednesday’s session, but the rebound quickly faded after weaker-than-expected private employment data reinforced the market’s growing conviction that the Federal Reserve has time to keep interest rates on hold. While the ADP report is no longer regarded as a reliable predictor of Friday’s non-farm payrolls, the gain of just 44k jobs was enough to strengthen an existing market narrative rather than create a new one. Investors had already been scaling back September rate hike expectations as optimism grew that the Strait of Hormuz could soon reopen, reducing the risk of another sustained energy-driven inflation shock.
Risk Assets Extend Gains as Fed Patience Narrative Builds
That shift in sentiment continued to support risk assets. Dow futures traded more than 250 points higher ahead of the US open, pointing to another record after Wall Street’s latest advance. Treasury yields remained soft as markets interpreted weaker hiring alongside falling oil prices as further evidence that the Fed could afford to remain patient. Expectations for a September rate hike have already retreated sharply over the past two days as prospects of lower energy costs eased concerns that inflation would reaccelerate. Against that backdrop, the ADP report simply raised the hurdle for the hawkish case.
Key Data
- ADP private payrolls: +44k, well below expectations
- Dow futures: more than 250 points higher ahead of the US open, pointing to another record
- September Fed hike odds: retreated sharply over the past two days
- Treasury yields: remained soft, tracking weaker hiring and falling oil prices
Kashkari’s Pushback Finds Little Support
Minneapolis Fed President Neel Kashkari attempted to push back against that repricing, defending his dissent at last week’s FOMC meeting by arguing that “now is the time to start slowly moving up as we get more data in.” Kashkari maintained that he still saw little evidence current policy was sufficiently restrictive and preferred taking “small steps” now rather than risking more aggressive tightening later. Markets, however, showed little inclination to embrace that message, with Kashkari and the other two dissenters remaining firmly in the minority camp.
Currency Markets: Euro and Sterling Lead, Kiwi Lags Despite Strong Jobs Data
In the currency markets, the Dollar was the second weakest major currency of the day, while the Euro led gains, followed by Sterling, with both also benefiting from buying against the Swiss Franc. The New Zealand Dollar underperformed despite stronger-than-expected employment growth in the second quarter, as investors focused instead on the jump in the unemployment rate to 5.6%, though that increase was accompanied by higher labor force participation rather than outright job losses, and the prospect that lower oil prices reduce the urgency for further RBNZ tightening, much as they reinforce expectations that the RBA will remain on hold. The Canadian Dollar traded in the middle of the pack, balancing weaker oil prices against generally constructive domestic fundamentals. The Yen also consolidated after recent intervention-driven gains.
Related Coverage
Fed & Rates Deep Dives
- Read the fuller ADP breakdown showing wage growth stayed firm even as hiring slowed sharply: US ADP Employment Miss at 44k, Growth Slows Sharply, But Wage Growth Stays Firm.
- See Kashkari’s full case for why the Fed should start raising rates now rather than wait: Fed’s Kashkari: Better to Start Raising Rates Now Than Wait.
Commodities & FX Deep Dives
- Read why Hormuz optimism is pulling AUD/USD in two directions at once, boosting risk appetite while dimming Australia’s LNG export outlook: AUD/USD Is Rising. Why Isn’t It Rising Faster?.
- See why Silver’s breakout attempt may have stronger foundations this time, from Hormuz-driven Fed repricing to industrial demand: Silver Breakout Attempt Builds as Hormuz Hopes Reshape Fed Expectations.
Eurozone & UK Data
- Read why Eurozone producer prices excluding energy kept rising even as the headline turned negative: Eurozone PPI Falls -0.3% M/M on Cheaper Energy, Core Producer Prices Still Rise.
- See why the Eurozone’s composite PMI hit an eight-month high, and what it implies for Q3 GDP growth: Eurozone Composite PMI Climbs to Eight-Month High, Indicates 0.3% Quarterly GDP Growth.
- Read why record UK job losses are casting a shadow over an otherwise improving services recovery: UK Services PMI Returns to Growth, but Record Job Losses Cast Shadow.
Asia-Pacific Data
- See why six straight months of real wage growth are strengthening the case for further BoJ normalization: Japan’s Wage Cycle Keeps Improving as Real Pay Rises for Sixth Month.
- Read why Japan’s manufacturing strength is offsetting a slowdown in services growth: Japan Services PMI Eases to 51.2 in July, Composite Holds at 52.7.
- See why Australia’s private sector hit a six-month high, and why accelerating selling prices remain a concern: Australia Composite PMI Climbs to Six-Month High on Stronger Services Activity.
- Read the full New Zealand labour report showing why strong hiring outweighs the uptick in unemployment: New Zealand Jobs Surprise: Strong Hiring Outweighs Rise in Unemployment.
- See why China’s services PMI slowdown is being driven by falling business confidence, not weaker exports: China Private Services PMI Slows Sharply to 50.4 as Domestic Demand Loses Momentum.
Frequently Asked Questions
Q: Did the weak ADP report cause the Fed’s dovish repricing?
A: Not on its own. September Fed hike odds had already retreated sharply over the prior two days as optimism grew that the Strait of Hormuz could reopen, easing the risk of another energy-driven inflation shock. The ADP report’s 44k gain, well below expectations, simply reinforced that existing narrative rather than creating a new one, since ADP is no longer considered a reliable predictor of Friday’s non-farm payrolls.
Q: Why did the New Zealand Dollar underperform despite a strong jobs report?
A: New Zealand’s Q2 employment growth beat expectations, but investors focused instead on the unemployment rate rising to 5.6% and on how lower oil prices reduce the urgency for further RBNZ tightening, much as they reinforce expectations that the RBA stays on hold. The unemployment uptick came alongside higher labor force participation rather than outright job losses, but markets prioritized the RBNZ policy implications over the headline hiring beat.
Q: Why is Kashkari’s push for another hike not moving markets?
A: Kashkari was one of three dissenters at last week’s FOMC meeting who favored an immediate hike, and he remains firmly in the minority. His argument for taking “small steps” now rather than risking more aggressive tightening later hasn’t gained traction because markets are increasingly convinced the Fed has room to be patient, especially with Hormuz-related oil price relief reducing near-term inflation risk.
Key Takeaways
- The dovish Fed narrative predates the ADP miss: September hike odds already retreated sharply over the prior two days on Hormuz reopening optimism; the weak ADP report reinforced that shift rather than starting it.
- Risk assets kept climbing on the same theme: Dow futures rose more than 250 points toward another record as Treasury yields stayed soft, both consistent with a patient Fed.
- Kashkari’s dissent remains a minority view: His case for immediate, gradual tightening found little market traction, with all three FOMC dissenters still outnumbered.
- Euro and Sterling led currency gains, Kiwi lagged despite strong jobs data: NZD underperformed on the unemployment uptick and reduced RBNZ urgency from lower oil, even though Q2 employment growth beat expectations.
- The Yen and Loonie sat out the bigger moves: Yen consolidated after its intervention-driven rally, while CAD balanced weaker oil against still-constructive domestic fundamentals.
What to Watch Next
Friday’s non-farm payrolls report is the week’s real test, not Wednesday’s ADP number, which has lost its predictive reliability. Markets will also keep watching Hormuz headlines, since further confirmation of reopening progress would extend the same oil-driven, Fed-patience narrative that’s already been building for two days.
