Stocks Rally on Prospects of Federal Reserve Rate Cuts

U.S. stocks rose Wednesday, as weak labor market data lifted hopes that the Federal Reserve will cut interest rates to support growth this year.

Key Takeaways:

• Weak private payroll growth and job openings suggest a cooling US economy.
• Speculation on Federal Reserve rate cuts boosts stock market optimism.
• Major indices show gains with Nasdaq leading the way.

US Stocks Rise After ADP Private Payrolls Growth Cools; Rate Cuts Ahead?

At 09:35 ET (13:35 GMT), the Dow Jones Industrial Average rose 85 points, or 0.2%, the S&P 500 climbed 18 points, or 0.3%, and the NASDAQ Composite gained 120 points, or 0.7%.

Private Payrolls Disappoint in May

Private payrolls increased at a slower-than-anticipated rate in May, with companies adding 152,000 workers during the month, down from a downwardly revised total of 188,000 in the prior month, according to figures from payrolls processor ADP. Economists had predicted a reading of 173,000.

The data comes a day after a separate report showed that job openings slipped to their lowest level in over three years in April.

These numbers point to a possible easing in labor demand in the world's largest economy, a trend that could fortify projections that the Federal Reserve will choose to slash interest rates later this year.

Traders will have a chance to further piece together the U.S. jobs picture on Friday when the all-important monthly nonfarm payrolls report is scheduled to be released.

This reading followed weak purchasing managers index data from Monday and a downgraded gross domestic product print from last week.

There is now a roughly 65% chance the Fed will roll out a 25 basis-point reduction in September, according to CME's closely-watched FedWatch Tool. Last week, the probability was below 50%.

Expectations of Rate Cuts Boost Wall Street

Expectations of eventual interest rate cuts offered some strength to Wall Street, although the prospect of a cooling U.S. economy kept gains limited.

US stocks popped on Wednesday, buoyed by tentative optimism for interest-rate cuts amid signs of slowing labor demand and a cooling economy.

The S&P 500 (^GSPC) rose 0.4%, while the tech-heavy Nasdaq Composite (^IXIC) led the gains, popping 0.7%. Meanwhile, the Dow Jones Industrial Average (^DJI) gained about 0.2%.

Market Reactions to Economic Data

Stocks have had a bumpy ride as the market wavers over whether to interpret a softening in economic readings as a positive sign for the chances of rate cuts from the Federal Reserve or a negative sign signaling the start of a broader slowdown.

Data out Tuesday showed job openings fell to a three-year low in April. Cracks in the labor market could spur the Fed to begin lowering borrowing costs, but they are also a sign the economy could be headed for a recession rather than a soft landing.

That said, hopes for a Fed shift appear to be growing. About 65% of traders now expect policymakers to reduce the benchmark rate at their September meeting, compared with less than 50% a week ago, according to the CME FedWatch tool.

ADP Report Highlights Labor Market Cooling

The ADP private payrolls report released Wednesday provided the latest evidence of labor market cooling, as private-sector growth for May came in below estimates. The bigger focus, though, is firmly on the labor data highlight of the week, the key monthly jobs report coming Friday.

In individual movers, Hewlett Packard Enterprise (HPE) shares rose as much as 15%, setting the stock up for its biggest gain since 2016. The surge came after HPE posted a revenue beat fueled by a jump in sales of AI-focused servers.