The Market Today

ADP Miss Sets Up Possible Disappointment in Friday’s Expected Nonfarm Payroll Recovery


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

ADP Miss Sets Up Possible Disappointment in Friday’s Expected Nonfarm Payroll Recovery: ADP reported that private payrolls grew 102k in June, less than the 140k expectation economists had penciled in, and nudged May’s estimate up from 27k to still-weak 41k. The smallest companies reduced headcount by 23k last month, according to the report, while medium-sized companies added a modest 60k and the largest essentially matched that with net hiring of 65k. Goods producers’ payrolls contracted 15k in the aggregate, shrinking in back-to-back months for the first time since early 2016. Manufacturing has actually added 9k payrolls over the last two months while the construction sector has lost 42k. In a positive development, net job growth in the services industry picked up 52k last month to 117k. However, June’s recovery kept the pace 50k below its 12-month average and near the low-end of its cyclical range. Only the education and health services sector surpassed its 12-month average, supporting the story that May’s weakness might have overstated the labor market’s demise but that the overall trend has downshifted in 2019 amid increased economic uncertainty. While private payroll data from ADP can vary wildly from that of the BLS, the 12-month average difference is just under 60k, this morning’s report poses downside risks to Friday’s BLS announcement. Economists currently expect the BLS nonfarm payroll report to show 164k total jobs gained in June, including 155k across the private sector.


Initial Jobless Claims Look Solid but Softer: Initial jobless claims totaled 221k last week, marginally better than expected and down from 229k the week before. While still solid, the trend has softened somewhat in recent weeks as other labor market indicators have cooled. The four-week average rose 0.5k last week to 222,250, a seven-week high.


Trade Deficit Widens Out on Stronger Trade Flows: As predicted by last week’s advanced goods trade data, the overall U.S. trade deficit widened more than expected May to -$55.5B, the widest of 2019. Total exports rose 2.0% while imports picked up 3.3%, providing a positive indicator for total trade flow activity but showing trade is likely to drag on the 2Q GDP calculation.


Later Today: At 8:45 a.m. CT, Markit will revise its services and composite PMIs before the ISM released its non-manufacturing PMI at 9 a.m. Manufacturing activity and clearly slowed amid increased uncertainty with fears it could filter into the services sector and labor market. The services sector withstood the pressure in May but is expected to have cooled in June. Also at 9 a.m., May’s Factory Orders report will be released and include data to help economists fine-tune their estimates for business investment.


TRADING ACTIVITY

Yesterday – Ten-Year Treasury Yield Tests Year-to-Date Low as Growth Concerns Linger: Treasury yields moved persistently lower Tuesday despite stocks gaining in an inconsistent day of ups and downs. Treasury yields were weighed down initially by U.K. gilts after a U.K. construction PMI slumped more than expected to its lowest level in more than a decade. The PMI-driven, 4-bps decline for the U.K.’s 10-year yield more than doubled after a speech by the head of the Bank of England. Continuing the cautious commentary from central bankers around the world, Governor Carney said the “intensification of trade tensions has increased the downside risks to global and U.K. growth.” The U.K. 10-year yield closed down 9.1 bps at a new 34-month low of 0.72%. After tracking gilts lower, the 10-year Treasury yield then tumbled to new lows as oil prices sank sharply in their worst performance since May. U.S. crude prices fell nearly 5% on the day as continued concerns about slowing global growth’s effect on demand overwhelmed OPEC’s recent announcement it was extending production cuts for nine months. Momentum seemed to take over once the 10-year fell back below 2.00%, ultimately pushing the yield down 5.0 bps to 1.97%, a new low close reaching back to November 2016. After swinging inconsistently throughout the day, a late-day spike left the S&P 500 up 0.3% and at its second consecutive record close.


Overnight – Treasury Yields Hold Lower after ADP Reports Smaller-than-Expected Recovery: U.S. equities and Treasury yields continued to diverge with futures pointing to the S&P 500 opening up at a new record while the 10-year Treasury yields ticked to a new low since the 2016. The trade truce between the U.S. and China over the weekend gave investors some reprieve that a trade deal was still possible, albeit potentially further out than desired. Weak global manufacturing PMIs earlier in the week, however, kept expectations for near-term central bank stimulus firmly in place. The pivot at central banks has supported the “everything-rally” tone to markets in recent weeks. Overnight, a softer services PMI from China combined with Monday’s manufacturing disappointment to drop the composite reading to an eight-month low, while just the opposite occurred in Europe. Mixed revisions to national services PMIs added 0.2-points to the Eurozone wide reading, pushing the index up to an eight-month high. German yields recovered off their lows, but the 10-year yield remained 1.8 bps lower at 0.39%, a new all-time low. Ahead of this morning’s first look at payroll growth in June, the 2-year Treasury yield was 1.4 bps lower at 1.74% while the 10-year yield had dipped 1.9 bps to 1.96%.


NOTEWORTHY NEWS

Fed’s Mester Said It’s “Too Soon” to Support a Rate Cut: Cleveland Fed President Mester said Wednesday, “I prefer to gather more information before considering a change in our monetary policy stance.” Mester, a 2020 voting member, said her base case is that “the economy will maintain its good performance in 2019” but admitted “recent data suggest that the downside risks to this forecast have risen.” She noted “At the present time, I believe it is too soon” to determine if that “positive baseline outlook…remains intact or whether the downside risks are coming to pass.” She placed the consumer on the “positive side” of her sector assessment and business investment on the “negative side.” If concerns about trade cause more companies to “take a wait-and-see attitude, the uncertainty itself could dampen business spending for some time to come.” On monetary policy, she said she doesn’t support cutting rates simply to boost inflation expectations, but a “few weak job reports, further declines in manufacturing activity, indicators pointing to weaker business investment and consumption, and declines in readings of longer-term inflation expectations” could mean the “base case is shifting” and the “policy rate could need to move down…to sustain the expansion.”


President Trump Announces Two Fed Nominees: The president announced Tuesday he would nominate Christopher Waller and Judy Shelton to the Federal Reserve’s Board of Governors. Christopher Waller is currently the director of research at the St. Louis Federal Reserve Bank under the leadership of Bank President James Bullard. Bullard dissented to the Fed leaving rates unchanged two weeks ago, preferring instead for the first of two quarter-percent installments he supports by the end of the year. Shelton, the current U.S. executive director at the European Bank for Reconstruction and Development, has previously lobbied for a return to the gold standard and recently signaled support for lower rates. In a recent interview with the Wall Street Journal she noted, “When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital. Today we are seeing impressive gains in productivity, which more than justify the meaningful wage gains we are likewise seeing—a testimonial to the pro-growth agenda. The Fed’s practice of paying banks to keep money parked at the Fed…instead of going into the economy is unhealthy and distorting; the rate should come down quickly as the practice is phased out.” Both require Senate confirmation.


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