S&P 500 reached a record of 6,502.08 after weak labor data boosted rate cut expectations

On Thursday, the S&P 500 closed at an all-time high, finishing the day at 6,502, with a rise of 0.83%, following a late rally that boosted stocks across all sectors.

Wall Street traders shrugged off the weak private sector labor data, betting heavily that Friday's government report would pave the way for a rate cut by the Federal Reserve.

According to reports, investors are looking for figures that justify a monetary easing without unleashing panic over an economic slowdown. The Nasdaq rose 0.98% to 21,707.69, while the Dow Jones advanced 350.06 points (0.77%) to 45,621.29.

This reaction occurred hours after the ADP report showed only 54,000 new private jobs in August, well below the expected 75,000 and lower than the revised 106,000 from July.

Instead of sinking the market, this weak result excited traders, who consider it soft enough for the Fed to act, but not so bad as to indicate a recession.

Bets on rate cuts soar

Markets reacted immediately. The odds of a cut on September 17 rose to 97%, according to the CME Group's FedWatch tool, reflecting the perception that the Fed has enough justification to act.

Stocks rose across all sectors on the idea that weak data means more flexible policies, the scenario that investors have been waiting for months.

The United States operates with increasing debt, rising deficits, and greater interference in the independence of the central bank.

Despite these tensions, the U.S. bond market has remained strong, with the 10-year bond yield falling by more than a third of a point this year, contrasting with higher yields in the United Kingdom, France, and Japan, where investors have pulled back due to fiscal concerns.

The volatility of bonds has also decreased. A key measure of fluctuations in the Treasury market is near its three-year low, showing that traders are not panicking… yet. This is despite all the pressure that Washington is putting on the Fed to keep rates low.

Ed Yardeni, founder of Yardeni Research, noted: “The bond market has been quiet.” He added that even with the fiscal burden and political interference, the United States “stands out for its remarkable stability.” Yardeni is known for coining the term “bond vigilantes” in the 1980s to describe investors who punish irresponsible fiscal policies by selling government bonds. But now, he says this group is not seen in America.

The bond market prepares for QE pressures

However, there are signs that the calm may not last. The 10-year bond recently fell below 4.17%, the first time since May, just as more data suggests slower job growth. With Europe on pause and Japan looking to raise rates, pressure is mounting in the U.S.

Stephen Jen, CEO of Eurizon SLJ Capital, predicts:

“The next pressure could be on QE, and if I were in the Trump administration, I would simply push the Fed to consider readopting it.”

William Dudley, former president of the New York Fed, commented: “Markets seem quite comfortable with this. Probably too comfortable, given the president's effort to influence monetary policy. But how this will unfold, there is still a long way to go.”

Michael Cudzil from Pimco added that the Fed could also start to reinvest mortgage-backed securities to cool down the housing markets.

Currently, the Fed is doing the opposite, allowing up to $5 billion in Treasury bonds and $35 billion in mortgage debt to mature monthly without reinvesting, a policy known as quantitative tightening.

Yardeni warned that any move by the Fed to buy bonds or change Treasury issuance would only buy time. Unless Congress starts cutting spending or increasing taxes, the U.S. could lose investors' patience. And when that happens, it won't be a press release; it will be seen in the market.

“Bond watchers are in Europe and Japan,” Yardeni said. “They exist, just not here. That could change quite quickly.”