Soft Economic Data Bolster Rate Cut Expectations: June 4, 2025

The stock market rally gained further momentum today following two weaker-than-expected economic prints that strengthened odds of incoming monetary policy easing. First it was ADP reporting the weakest pace of private sector hiring in 26 months and then it was ISM-Services pointing to contracting demand in May. Meanwhile, progress in trade deal negotiations between Brussels and Washington followed positive anecdotal evidence regarding negotiations with New Delhi yesterday, which is helping to subdue inflation expectations and bolster corporate earnings prospects. Soft data, furthermore, are sending yields to the basement while equities continue their march higher. Outside of shares and Treasuries, investors are also picking up forecast contracts and non-cyclical commodity futures while they neglect bitcoins, the greenback and cyclical commodities ex copper.

Hiring Falls Below Expectations

Private sector hiring slowed last month as firms adapted to the volatile economic environment. ADP reported the lightest pace of headcount additions since March 2023, coming in at 37,000. The result was well below the 115,000 expected and the 60,000 from April. The following categories and the number of jobs they created led expansion:

• Leisure/hospitality, 38,000
• Financial activities, 20,000
• Information, 8,000
• Construction, 6,000
• Other services, 4,000.

Weighing on performance and the number of each categories lost positions were as follows:

• Professional/business services, 17,000
• Education/health services, 13,000
• Natural resources/mining, 5,000
• Trade/transportation/utilities, 4,000

Mid-sized firms cushioned the blow from labor losses in the small and large segments, adding 49,000 applicants. Small firms with 49 workers or less and large firms with 500 employees or more lost 13,000 and 3,000 positions, respectively. Wage trends were stable, with the year-over-year (y/y) change in annual pay across job stayers and changers remaining at 4.5% and 7%.

Past performance is not indicative of future results

US Overall Services Fall into Contraction

Services sectors contracted as a whole in May for the first time in 12 months as households curtailed spending. May’s ISM-Services Purchasing Managers’ Index (PMI) declined to 49.9, a whisker lower than the contraction-expansion threshold of 50. May’s print was also significantly beneath the median forecast of 52 and April’s 51.6. New orders fell off a cliff due to consumers replenishing their savings and firms focused on working down their backlogs as a result. Meanwhile, employment and business activity were resilient, but the prices paid component rose to 68.7 from 65.1. Still, the cost forces expressed in the PMI surveys haven’t made their way to the hard data and may be motivated by fear rather than manifestation.

Uncertainty is Likely to Give Way to Growth

Efforts to boost manufacturing in the US by renegotiating global trade deals, not surprisingly, are causing heightened uncertainty among businesses and consumers. As such, softer-than-projected data in some patches of the economy is to be expected as reflected by today’s ADP and services prints. Once cross-border agreements are cemented and the Fed reduces rates, the economy is likely to reaccelerate as the White House shifts its focus to other pro-growth policies, including reducing taxes, easing regulations and lowering energy costs.

International Roundup

Hong Kong Experiences Second Month of Contraction

Hong Kong business activity continued contracting last month, but the pace of the decline eased, according to the S&P Global Hong Kong SAR PMI. The gauge climbed from 48.3 to 49.0, moving closer to the contraction-expansion threshold of 50. While all four categories remained in contraction, they followed the headline trend. New orders decreased only marginally. Overall input price increases moderated and gate stickers were slightly stronger, but uncertainty about future US trade policy and weak domestic demand caused pessimism among businesses to linger.

South Korea Elects New President

After months of turmoil, South Korea has elected Lee Jae-myung as the new president. Lee starts the position today following yesterday’s snap election. He has vowed to improve relations with North Korea, which has been growing closer to Russia. He has also pledged to focus on reviving the economy and strengthening the country’s ties with the US. Disputes within Parliament and the general public, however, have widened political differences, making Lee’s job more difficult. The new leader was traditionally a liberal politician but has increasingly evolved into more of a centrist.

South Korea Price Pressures Eases

Optimism about the Bank of Korea resuming its easing practices strengthened after this morning’s Consumer Price Index (CPI) depicted lower-than-expected inflation. The index fell 0.1% month over month (m/m) last month while economists projected an unchanged 0.1%. Relative to May of last year, the gauge was up 1.9%, below the consensus estimate of 2.1%, which was also the April print. The Bank of Korea has a 2% cost pressure objective. While charges for livestock and certain agricultural products increased, oil, fruit and vegetables were less expensive, supporting the benign CPI results. The monetary policy authority’s next decision on borrowing costs is July 9.

Australia’s Economic Expansion Slows

Australia posted disappointing gross domestic product numbers with the country’s economy expanding only 0.2% quarter over quarter (q/q) in the three-month period ended in March. The print missed the consensus forecast of 0.4% and was a deceleration from 0.6% in the last interval of 2024. Relative to the first three months of last year, GDP was up only 1.3%. Economists expected the pace to quicken from 1.3% in the preceding publication to 1.5%. The economy faced the headwinds of heavy rainfall and flooding that caused weak results from mining, tourism and shipping. Consumption and corporate investment also moderated. While public outlays were a drag on the headline result, private demand, while sluggish, was a positive factor. Encouragingly, the household savings rate hit 5.2%, up from 3.9% in the last three months of 2024 as disposable incomes increased. In the business world, capital expenditures expanded by only 0.1% q/q, down from 0.7% in the last reporting quarter while consumer spending was up 0.2%, slowing from 0.6%.

While Construction and Manufacturing Fall

The Australian Industry Group’s (AIG) benchmarks of construction and manufacturing revealed that the two sectors are still retrenching. The AIG Construction Index improved modestly from -7.9 in April to -6.4 last month while the AIG Manufacturing Index moved from -25.2 to -23.5.

Singapore Business Sentiment and Orders Soften

New orders and business sentiment in Singapore have decelerated, causing the city-nation’s S&P Global PMI to fall from 52.8 in April to 51.5 last month. According to S&P, the growth rate of purchases within the composite index hit a four-month low as tariffs curtailed demand, which contributed to confidence plunging to the worst level in nearly five years. Input cost inflation also softened and plunged to a 45-month low. Businesses, meanwhile, have been trimming headcounts, leading to an increase in backlogs. While overall activity slowed, May was the fourth-consecutive month in which the PMI was above the contraction-expansion threshold of 50, a significant reason for optimism going forward.