The Market Today
ADP Estimates Private Payrolls Grew by 235k, Markets Likely to Remain Focused on Fallout from Cohn Resignation
by Craig Dismuke, Dudley Carter
ADP Estimates No Slowdown in the Growth of Private U.S. Payrolls: Ahead of this Friday’s nonfarm payroll report, ADP projected private industries added 235k net employees in February, what would be another stronger-than-expected month of payroll growth in the U.S. Economists’ estimate of private payroll growth for Friday’s BLS data is currently 198k. In addition to the positive current month print, January’s figure was revised up 10k to 244k, widening the divide between ADP and the BLS’s current level of 196k. Within the details of the ADP release, the mix of hiring between goods-producing and services-providing industries was relatively consistent with January. ADP estimates goods industries added 37k (39k in January) services industries contributed the balance of 198k (205k in January). Hiring estimates were also consistent at the sector level. Versus the 12-month averages, trade, transportation, and utilities as well as leisure and hospitality continued to stand out. Solid hiring has become a presupposition in recent payroll reports and has shifted the focus to earnings figures as an indication of inflation pressure and progress towards the Fed’s elusive inflation mandate. Nonetheless, another strong hiring figure should be a feather in Fed hawks’ hats as they look to continue normalizing the overnight rate.
Nonfarm productivity, a much-talked about topic at the Fed and among economists because of its role in the outlook for both economic and wage growth, was revised up from -0.1% to flat for 4Q17. Unit labor costs, which are generally negatively-correlated with productivity, was also raised in revision. The catalyst for the somewhat uncommon directional inconsistency was a higher-than-expected growth rate for compensation per hour (employee hours were unchanged). Previously estimated at 1.8%, compensation per hour rose at an annualized 2.4% rate in 4Q17 which took the YoY rate up to 2.9%, the fastest rate since 4Q15. While productivity remains subdued, activity on the employee costs side should provide the Fed another data point to support its claim that wages should pick up as the labor market continues to tighten.
Not surprisingly, the trade deficit widened $2.7B in January, despite a significant monthly depreciation in the Dollar, and could be thrown in as another talking point for the White House as it proceeds on its campaign against what it sees as unfair foreign trade practices. Mortgage applications rose 0.3% overall last week as the purchase index dropped 0.5% (+6.2% the week before) but refinancing activity improved by 1.5% (-1.2% the week before). The rebound in refinancing occurred even as the MBA’s estimate of the average 30-year mortgage rate ticked up 0.01% to 4.65%.
Later this afternoon, the Fed will release its latest Beige Book and results for consumer credit activity in January.
Yesterday – Treasury Yields Tracked Stock Fluctuations to Edge Higher for the Day: Stocks fluctuated Tuesday as a couple of forces helped push the major indices up off of their daily lows made just before 11 a.m. CT after an opening jump faded. Reports began to filter out around 11:30 a.m. that Senator Perdue had talked with the President and believed he would be open to changing his stance on tariffs. Those reports, which immediately gave stocks a boost, came amidst growing calls from key Republicans for the White House to revisit last week’s pledge to levy tariffs on steel and aluminum imports. Also supporting stocks’ rebound was the advancement of Senate Bill 2155, with bipartisan support of 67 to 32, forward for debate. The bill intends to provide relief from certain Dodd-Frank regulations to certain financial institutions. The Dow lagged with just a 9 point, or 0.04% gain, while the S&P 500 added 0.26%. Treasury yields rose and fell and rose again as they tracked the swings in equity markets. Yields, which had risen overnight, fell back as equities drifted lower in the morning. As equities recovered, so too did yields. The 2-year yield added 1.2 bps to 2.25% while the 10-year added 0.6 bps to 2.88%. Despite the developments on the trade front, the Dollar remained weaker after a steep descent ahead of U.S. trading.
Overnight – Cohn Resignation Set to Weigh on Wall Street: The biggest news overnight came less than an hour after U.S. trading closed Tuesday when news broke that Gary Cohn would step down as the President’s chief economic advisor. Cohn, who was considered a friend of Wall Street and vital in Republicans’ success in passing the tax bill, had argued against the announcement of steel and aluminum tariffs. The market’s disappointment with Cohn’s departure was quickly and clearly evident. U.S. equity futures sank, Treasury yields fell, and the Dollar snapped lower. The negative sentiment and weaker Dollar compounded the effects in Asia where every major index was weaker on Wednesday. Equity pressure has been less severe in Europe but sovereign curves have fallen and flattened, almost exclusively, and yields are trading near their lows of the day. The 2-year Treasury yield was down 1.8 bps, the 5-year yield was down 3.5 bps, and the 10-year yield was 3.7 bps lower. Lost in the Cohn shuffle, were remarks in a speech from Fed Governor Brainard (more below) that suggested multiple tailwinds to U.S. growth could speed up the pace of Fed rate increases. Those remarks, coming from one of the biggest doves on the voting committee, appeared to add pressure to equity selling and briefly support a move up in yields.
Brainard Raises Brows After Saying Multiple Tailwinds Could Speed up Pace of Fed Hikes: Fed Governor Brainard, one of the more dovish Fed officials with a vote, took a different tone in some of her first public remarks on monetary policy since late last year. Brainard said in a Tuesday evening speech “The macro environment today is the mirror image of the environment we confronted a couple of years ago. …In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true (emphasis added).” She added “The most notable tailwind is the shift in America’s fiscal policy stance from restraint to substantial stimulus in an economy close to full employment.” Therefore, Brainard believes, “Continued gradual increases in the federal funds rate are likely to remain appropriate to ensure inflation rises sustainably to our target and to sustain full employment, …Of course we should be ready to adjust the path of policy in either direction if developments turn out differently than expected.”
Factory Orders’ Fall Matched Expectations, Capital Goods Activity Revised Lower: Last week’s preliminary disappointment in January’s capital goods data, a key leading indicator for business investment equipment, deepened slightly Tuesday as revisions were rolled out as part of the month’s Factory Orders report. Total factory orders were down 1.4% (ex-transports +0.4%) as expected and the big estimated drop in transport orders, largely responsible for the estimated 3.6% decline in overall durable goods orders, was confirmed. In the important capital goods components, the initial 0.2% drop in orders was revised to -0.3% and a 0.1% pick-up in shipments was changed to a 0.1% pullback.