The Market Today

ADP Projects Economy Has Regained 27% of Lost Private Payrolls Through June


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE

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Monitoring the Virus Headlines: In the latest update from Florida’s health officials, cases increased at a below-average 4.2% rate, positive tests rose from 13.7% to 14.6%, and the median age of new cases registered 37 for a second day. The state also reported a record number of infections at long-term care facilities. In Texas, the governor expanded the ban on elective surgeries to further protect hospital capacity before the state reported a record (6,975) number of new infections. California recorded its second biggest jump in infections (6,367, 2.9% increase versus 7-day average of 2.8%) and a 6.3% increase in hospitalizations to a new high. As a country, the U.S. reported it single largest daily increase yesterday, a 1.9% daily increase compared to last week’s 1.6% average increase. The EU announced it was removing travel restrictions for several countries but extending a ban on U.S. travelers due to the status of the outbreak.


TODAY’S CALENDAR

ADP Projects 2.4 Million Private Payrolls Added in June: The June ADP report showed a gain of 2.369 million private payrolls, a bit weaker than expectations but a positive step nonetheless.  Expectations were for a gain of 2.900 million. Payrolls were particularly strong in the manufacturing and construction sectors.  Overall, goods producing jobs rose 457k while service-sector jobs increased 1.912 million.  ADP also revised their May tally up from -2.8 million to +3.1 million, now more closely aligning with the BLS report. Looking at the details of the two-month gains, the goods-producing sector has recouped 47% of its lost jobs while the service sector is lagging behind having recouped just 25% of its lost jobs.  In total, ADP projects the economy has regained 5.4 million (27%) of its 19.7 million lost private payrolls through June.

FOMC Minutes – Forward Guidance: The Fed is scheduled to release its June 10 FOMC Meeting Minutes today at 1:00 p.m. CT.  The Minutes are expected to contain talks about forward guidance, including a possible discussion on yield curve control.

Manufacturing Index, Construction Spending, Auto Sales: The ISM Manufacturing index for the month of June, scheduled for 9:00 a.m. CT, is expected to show further stabilization, rising from 43.1 to 49.8.  Also at 9:00 a.m., May’s construction spending data is expected to show a 1.0% gain as construction remains one of the more quickly rebounding sectors of the economy. Throughout the day, June’s auto sales data will be released and is expected to show sales creep up from 12.2 million (ann.) to 13.0 million, still well below the 17.0-million trend heading into the virus outbreak.

Mortgage Applications Inch Lower Despite Mortgage Rates Hitting New Low: Mortgage applications for the week ending June 26 were soft for a second week in a row despite mortgage rates falling to a new record-low.  Total applications fell 1.8% on a 1.3% decline in purchase apps and a 2.2% drop in refi apps. Despite the disappointing results for the reference week, purchase applications remain 19% higher than they average in 2019 while refis remain 93% higher.   According to the report from MBA, the 30-year mortgage rate fell 1 bp to a new-record-low 3.29%.


YESTERDAY’S TRADING

Equities Cap Historic Quarter with Strong Daily Gain: U.S. equities rose Tuesday to cap the strongest quarter for the S&P 500 since 1998. Since bottoming in March, equities have recovered sharply on hopes that historic fiscal support and economic reopening can successfully treat an economy infected by COVID-19 and measures taken to slow its spread. After a strong start, markets leveled off in June as a resurgent virus cast a shadow over early signs of recovery. The S&P 500 climbed steadily Tuesday to post a 1.5% gain and cement a 20.0% second-quarter gain. The rebound followed a 21.2% tumble in the first quarter as the pandemic began to sweep around the world.

Treasury Yields Pushed Higher as Equities Accelerated: The uncertainty that overhangs the current outlook was echoed by several Fedspeakers throughout the day and reflected in mixed economic signals from the latest consumer confidence update and a regional activity survey (more below). As stocks rose, Treasury yields edged higher and steeper to pull the belly of the curve off record-low yields. The 5-year yield added 1.4 bps to 0.29% after touching a record low of 0.26% in overnight trading. The 10-year yield rose 3.3 bps to 0.66% while the 2-year yield ended flat at 0.15%. Reflecting the effects of the Fed’s pledge to keep rates low and supportive, the Treasury curve changed very little in June. The 2-year yield fell 1.2 bps while the 10-year yield added 0.3 bps.


OVERNIGHT TRADING

Interesting Start for Markets in July as More Data Points to Recovery: Global markets appear conflicted to start to July as investors continue to balance a faster U.S. infection rate with the ever-growing body of evidence showing the economy slowly gaining steam as lockdowns are lifted. Ahead of an incredibly busy day of U.S. economic data, an array of global reports reflected continued improvement in manufacturing activity in June. Another manufacturing PMI for China (51.2) confirmed the expansionary signal in the government’s report on Tuesday. A handful of smaller Asian countries saw the pace of contraction slow while a couple bounced back to join China in expansionary territory. A similar story unfolded in reports for Europe and Germany’s retail sales bounced back in May by much more than expected.

Bond Yields Rise Even as Equities Lose Momentum: Nonetheless, equities lost momentum in Europe with major indexes retreating after wrapping up a historic second quarter recovery on Tuesday. After a generally upbeat day for Asian markets, European equities had registered widespread declines and U.S. futures were weaker by between 0.5% and 1.0% ahead of this morning’s private payroll estimate from ADP. Despite the softer tone for equities, sovereign bond yields were on the rise. Just before the ADP report, the 2-year yield was 0.2 bps higher and the 10-year yield had added 2.0 bps, both off highs from earlier in the session. Those moves trailed even larger increases in Europe, where Germany’s 10-year yield had advanced by 4.7 bps. Following the slight miss for payrolls, the major markets roughly held their positions at 7:30 a.m. CT.


NOTEWORTHY NEWS

Second Wave of Economic Reports Offered Mixed Signals About the Outlook: The MNI Chicago PMI barely budged in June while consumer confidence posted a bigger bounce than was expected. After a steep three-month decline, the headline PMI added just 4.3 points to 36.6, coming up well short of the 45.0 expected and holding deep in contractionary, sub-50 territory. New orders contracted at a slower rate while the decline in employment accelerated. More optimistically, the Conference Board’s Consumer Confidence index rose from 85.9 to 98.1 in June, easily clearing the 91.5 expected, on a steep recovery in the current assessment and a solid gain for expectations. While some key details stabilized and the degree of the gain was a welcomed surprise, the remaining 34.5-point gap with February’s pre-pandemic level reflects the long road to full recovery.

Fed’s Williams Sees Long Road Ahead: While he is “confident” the economy will eventually recover to its strong pre-pandemic position, New York Fed President Williams echoed the consensus message of caution, stressing that “it will take time” for the economy and labor market to fully heal. He noted the “economy’s fate is inextricably linked” to the success of efforts to contain the virus. Fiscal stimulus is playing “an incredibly important role” in stabilizing the economy and the Fed’s response has helped shore up financial markets. His tone was consistent with Fed Chair Powell’s morning testimony before a House panel. Williams again dismissed the idea of using negative rates in the U.S. and said the central bank has made no decisions on possibly adding yield curve control to the official toolkit.


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