Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Stocks rose while U.S. bond yields and the dollar fell on Wednesday, after surprisingly weak private sector jobs data increased the likelihood that the Federal Reserve will lower interest rates again next week. 

More on that below. In my column today, I look at China's seemingly incongruous twin strategy of allowing its currency to strengthen and boosting exports. There are good reasons to believe it will work.

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If ultra short-dated U.S. T-Bill yields are the best proxy for near-term Fed rate expectations, the signals being sent out now could not be clearer. The one-month bill yield on Wednesday slumped nearly 8 basis points below 3.77%.

Remarkably, it has fallen nearly 25 basis points since Friday, meaning bills traders have effetively moved to fully price in a quarter-point rate cut from the Fed next week in the last four days. 

Expectations for a Fed rate cut next week have been stregthening for days, but Wednesday's ADP jobs data looks to have sealed the deal. The 32,000 fall in private sector jobs in October was a surprise - economists had expected a slight rise - marking the worst month since early 2023.

Many economists and investors have long looked down on the ADP report, saying it bears little correlation to the broader official non-farm payrolls data. But post-government shutdown, perhaps ADP will be scrutinized more closely - and if low hiring morphs into outrihgt firing, Houston, we have a problem. 

After rallying 5.5% last week - its best week in over a year - the Russell 2000 strongly outperformed again on Wednesday, surging nearly 2%, more than six times the benchmark S&P 500's 0.3% rise. 

This may seem a little surprising, given that the bulk of surprise ADP 32,000 job losses were reported by small businesses. With AI bubble fears refusing to die down, the rotation into small caps that has played out in recent months may have further to run.

China's desire to keep its exports growth engine roaring seems at odds with the steady appreciation of its currency. But these trends can continue to co-exist, highlighting the tenuous relationship between a country's exchange rate and trade flows.

The People's Bank of China has steered the yuan 3% higher since April to 7.07 per dollar, its strongest point in over a year. The currency is expected to stay on that path, with many analysts predicting the dollar will break below 7.00 yuan next year, perhaps to 6.60 yuan. That would imply a further 7% appreciation to levels last seen in 2022.

Yet one clear takeaway from the Communist Party leadership's October planning meeting, or plenum, was Beijing's reluctance to wean itself off its export-oriented growth model. 

On the one hand, that makes sense given China's domestic economy is still struggling with a burst property bubble, deflation and weak demand. Exports have contributed more than half of headline real GDP growth over the last two years, according to Goldman Sachs.

But shouldn't a strengthening currency make China's goods more expensive, and therefore uncompetitive, on the global market? 

In theory, yes. But in practice, the robust yuan certainly doesn't appear to be stemming the flow of China's export volumes. Brad Setser, senior fellow at the Council on Foreign Relations and a long-standing China watcher, notes that China's export volumes have risen a cumulative 40% since the end of 2019, while imports have increased just 1%.