The Market Today
ADP Projects 178k Jobs; Autos and Construction Data Weak; Fed Bank Model Projects R* Just One Hike Away
by Craig Dismuke, Dudley Carter
Today’s Calendar – ADP Report Projects Continued, Solid Private Sector Job Growth: The July ADP report showed 178k private sector payrolls added in the month, 12k below consensus estimates. The July report was the second weakest report of the last 8 reports and showed 24k fewer jobs added than the 12-month average. The sector dynamics affecting wage growth were mixed with leisure and hospitality jobs adding just 15k (+29k 12M avg.), construction adding only 6k jobs (+19k 12M avg.), manufacturing actually losing 4k jobs (+8k 12M avg.), but information technology adding 8k jobs (-3k 12M avg.). Unfortunately, the ADP report has lost some of its correlative accuracy recently, missing the BLS report by an average of 82k over the last 4 months, the worst 4-month stretch in over 5 years. Economists were already expecting the ADP report to be high versus Friday’s BLS data, expecting the BLS report to show only 180k private sector jobs added versus the 200k expected from ADP. The consensus BLS projection may be revised down closer to 170k over the next 48 hours. Despite ADP disappointing, a BLS report of 170k or higher would likely keep the concern focused on an overly hot labor market rather than a pullback in job creation.
The ADP report is the only major economic report of the day and attention will now turn to tomorrow’s extremely busy calendar and Friday’s BLS labor reports.
Overnight Activity – Treasury Yields Reverse a Portion of Tuesday’s Drop as Apple Looks Set to Lead U.S. Equities Higher: Global equities traded unevenly overnight with activity in Europe softening after a mostly positive start in Asia. Information technology finished atop Japan’s Nikkei with the sector’s strength attributed to better-than-expected earnings results from Apple. After markets closed yesterday, Apple reported adjusted earnings of $1.67 per diluted share (expected $1.57), revenue of $45.4B (expected $44.9B), and 41MM iPhones shipped (expected 40.7). Shares of Apple jumped more than 5% in after-hours trading to a new all-time high. Tech is likely to lead the way for U.S. equities Wednesday with Nasdaq futures the clear outperformer, up 0.7%. Sovereign yields have inched higher to recover some ground lost in Tuesday’s tumble. Treasury yields are up in line with the global trend with the 2-year yield up 1.0 bp to 1.35% and the 10-year yield 1.6 bps higher at 2.27%.
Yesterday’s Trading Activity – Stocks Ignored More Disappointing Auto Sales but Treasurys Took Notice: U.S. stocks rallied Tuesday as the Dow recorded its fifth consecutive daily record close and the S&P and Nasdaq recovered from Monday’s losses. The Dow closed 24 points below its next major milestone – the 22,000 mark. On an intraday basis, the blue-chip index had briefly climbed to 21,990 earlier in the day. Financials led the S&P which, along with strength in technology and utilities, was enough to offset losses in shares of auto companies. General Motors’ 3.4% decline led losses for the sector with Ford’s 2.4% the second worst of the day. Ford reported a 7.4% decline in YoY sales while GM’s results showed a 15% plunge from July 2016. Total auto sales disappointed again with the biggest YoY decline since August 2010. While equities were shielded somewhat from the sector’s struggles, Treasurys rallied sharply as the weak auto sales data began to trickle in. On the day, the 2-year yield fell 0.8 bps to 1.34% while the 10-year yield dropped 4.1 bps to 2.25%. U.S. crude prices fell back below $50 on reports OPEC production grew in July and the API indicated U.S. inventories likely rose for the first time in five months. The Dollar stabilized and recovered marginally from Monday’s 15-month nadir.
San Francisco Fed Bank Model Shows FOMC Almost Back to Neutral on Target Rate (Bloomberg): According to a Bloomberg article released yesterday, “The so-called neutral U.S. interest rate fell in the second quarter by the most since 2010, according to a widely-cited estimate produced by Federal Reserve economist Thomas Laubach and San Francisco Fed President John Williams. The theoretical rate known in economic circles as ‘r-star’ — which is adjusted for inflation and would neither stimulate nor restrict an economy growing at its trend pace — declined to -0.22 percent, from 0.12 percent in the first quarter. In comparison, the Fed’s benchmark rate, adjusted for core inflation, is currently -0.35 percent, which suggests the central bank is nearly at a ‘neutral’ monetary policy setting, according to the model.” While the FOMC has distanced itself from rules-based models, the model adopted by the San Francisco Fed Bank is likely to have at least some sway by the bank’s former president, Fed Chair Yellen.
ISM Shows Manufacturing Activity Pulled Back in July but Continued to Expand: The ISM Manufacturing Index cooled 0.1 point more than expected in July but remained at a relatively strong level compared to readings from recent history. The headline index fell from 57.8 to 56.3, the new median mark for 2017. The details of the report were slightly disappointing. The new orders and employment indices fell back in July as did the index tracking production output. The biggest increase within the subcomponents was in the prices paid index which rose seven points. Despite the softer details, the results showed continued expansion to start the second half of 2017. Eight of the 10 indices pointed to expansion. The inventories index showed inventory levels were unchanged from June while the index tracking customer inventories fell below 50 indicating customer inventories are considered too low (a potential positive for future growth).
Construction Spending Disappoints, Could Detract in 2Q GDP Revisions: June’s construction spending data was much weaker than expected and a slight positive revision to May’s data was offset by a much larger negative revision to April’s results. The net effect is likely to be a modest negative revision to 2Q growth. Within the details of the report, the biggest drop occurred in public construction spending which fell 5.4% from May. Private construction spending also fell as a 0.2% decline in residential investment offset a 0.1% improvement in the non-residential category. As seen in the housing starts and building permits data, multifamily activity drove the disappointment in private residential spending and offset a modest gain in spending on single family residences.
KBW CEO Expects More Deposit Rate Pressure with Next Rate Hike (Bloomberg): According to a Bloomberg article, “The share of Federal Reserve rate hikes that banks pass along to savers, known as deposit betas, should finally start to grow, Keefe, Bruyette & Woods Chief Executive Officer Thomas Michaud said. ‘I’m not terribly surprised that deposit betas have been low, but I also think it would be a mistake for the industry to believe that it’s going to remain this way,’ Michaud said Tuesday in an interview during the KBW Community Bank Investor Conference in New York. Lenders should soon expect to share at least half of Fed rate increases with their customers, Michaud said. As savers pay more attention to what banks will pay to hold their funds, deposits will become harder to come by, Michaud said. That could lead to more mergers among community and regional banks as the need for core deposits to fund loan growth will increase as interest rates rise, he said.”