The Market Today
ADP Report Shows Private Payroll Growth Slow, But Remains Strong
by Craig Dismuke, Dudley Carter
ADP Report Shows Private Payroll Growth Slow, But Remains Strong: ADP’s Private Payroll report for the month of February showed a gain of 183k new private sector jobs, 40k below the 12-month trend rate of growth. The goods-producing sector showed solid results with 44k more jobs (+52k 12-month average) while the service sector was a bit soft at +139k (+171k 12-month average). The construction and manufacturing sectors both had solid results, up 25k and 17k, respectively. On the services side, the weaker-than-trend results came from the trade/transportation/utilities and leisure/hospitality sectors, up just 14k and 5k, respectively. January’s ADP tally was revised up from +213k to +300k. Despite the weaker-than-trend results, another 183k of private sector payroll growth is an encouraging sign that the labor market remains healthy despite some of the recently flagging economic data.
Record-High Trade Deficit in 2018: The December trade balance report showed a $2 billion larger trade deficit than anticipated along with a revision to November’s figure increasing the monthly deficit another $1 billion. Imports rose 2.1% in December while exports fell 1.9%, the largest drop for exports since 2016. For all of 2018, the trade deficit grew to $621 billion, the largest annual deficit since 2008. On a bilateral basis, the goods trade deficits with China, Mexico, and the EU were the largest on record. The initial 4Q GDP report showed trade not impacting the final 2.6% tally. However, given this morning’s trade figures, it is likely to drag one- to two-tenths from the total.
Spike in Mortgage Applications Short-Lived: Mortgage applications for the week ending March 1 fell 2.5% on a 2.5% decline in purchase apps and a 2.0% drop in refis. According to the MBA data, mortgage applications were fractionally higher during the observation period with the 30-year mortgage rate up from 4.65% to 4.67%. Looking at the 4-week moving averages, purchase applications have now given up their January to early-February gains.
Fedspeak: New York Fed Bank President Williams will speak at 11:00 a.m. CT. Also speaking at 11:00 a.m. is Cleveland Bank President Mester.
Yesterday – U.S. Assets Ended Little Changed as Investors Weighted U.S., China Data: U.S. assets were little changed by Tuesday’s close as investors weighed China’s lower growth target and planned stimulus against better-than-expected U.S. economic data. Less than two months after the economy posted its weakest annual expansion in nearly 30 years, China’s government lowered its official growth target to a range of 6% to 6.5%. However, they also announced stimulus measures, including tax cuts and planned cuts to reserve requirements for smaller banks. Things perked up briefly, however, around 9 a.m. CT after two U.S. reports showed a rebound in the U.S. services sector (more below) and a second month of stronger new home sales (more below). And while stocks flirted with positive territory several times during the session, the last few ticks pulled the S&P 500 down from its daily high and back into negative territory just before the close. Combined, the Dow, S&P 500, and Nasdaq fell 17 points in a quiet session. Treasury yields also pushed higher after better-than-expected U.S. data but quickly rolled over to end essentially unchanged on the day. After touching 2.57% following the stronger U.S. data, the 2-year yield ended up 0.4 bps at 2.55%. The 10-year yield fell 0.5 bps to 2.72% after touching 2.75% just after 9 a.m. CT.
Overnight – Chinese Stocks Standout in Mixed Session for Global Equities: U.S. assets traded with a risk-off tone for most of the overnight session as global markets continued to lack direction and investors awaited a first estimate of how many new jobs were created by the private U.S. economy in February. Amid Wednesday’s uncertain equity trends, Chinese stocks strengthened for a fourth session with the CSI 300 adding another 0.8% to its highest level since May 23. Before yesterday’s session, the country’s government announced new stimulus measures in response to a slower growth outlook. Elsewhere, the Stoxx 600 was near unchanged for the day while U.S. futures had ticked 0.2% lower ahead of February’s ADP report. Also ahead of the private payroll data, Treasury yields had been dragged back near their daily lows (2s -1.0 bps, 10s -1.4 bps) by a move lower across Europe. Yields on UK Gilts were leading the move (10s -4.0 bps) on headlines quoting an EU official that Tuesday’s Brexit “discussions have been difficult.” Brexit was also a key driving force behind the OECD lowering its 2019 global growth forecast for 2019 from 3.5% to 3.3% overnight, with European countries seeing some of the most significant downgrades. Yields rose after the in-line ADP print but pulled back after the wider-than-expected trade deficit.
Employment Slowed But New Orders and Activity Hit New Cycle Highs To Boost Services PMI: The ISM’s Non-manufacturing index rebounded more strongly than expected in February as new orders and production gains more than offset a softer read on employment. The headline PMI added 3 points last month to 59.7, its best level in three months and just 1.1 points below its cyclical high of 60.8 from September. The production and activity index jumped 5 points and new orders popped 7.5 points, both reaching their highest levels since 2005. Supplier delivery times slowed for the first time in four months, another signal of more brisk activity. On the downside, the employment index cooled to an eight-month low ahead of Friday’s nonfarm payroll data. Away from the indices that directly affect the headline, both backlogged orders and new export orders picked up while prices paid slowed, a sign that the stronger activity in February created little inflationary pressure. While the comments section continued to reflect some uncertainty tied to tariffs, the better metrics should comfort economists and investors who had hoped calmer markets, the Fed’s plan for patience, and a potential way forward on trade would lead to a recovery of economic activity.
December’s New Home Sales Were Better than Expected But 2018’s Total Was Hit by Negative Prior Revisions: New home sales closed out 2018 at a better-than-expected pace in December, although total activity for 2018 was a bit softer after 75k in downward revisions to the prior three months’ sales. New homes sold at a 621k unit annualized pace in December, better than the 600k economists had expected, representing a 3.7% increase from November. November’s 16.9% estimated surge was revised to a less-spectacular 9.1% gain. Total sales rose 5% in the South and 1.4% in the West, the two regions with the greatest volumes. There were offsetting swings in the smaller Northeast and Midwest. Based on the current data, which is still subject to revision, total sales rose 0.9% in 2018, the slowest pace since 2011. The median price rebounded 5% in December to $318,600 but remained down 7.2% from a year ago. Months’ supply dipped to 6.6 months but remained elevated above 2017’s average of 5.4. Amid continued weakness in the housing data, there have been some signs that lower rates and slower price gains may be starting to have a positive effect on demand. Purchase applications have firmed up with mortgage rates back near 12-month lows and pending home sales broke a string of nine months of weaker activity in January.
Tuesday’s Fedspeak: Dallas Fed President Kaplan published an essay Tuesday titled “Corporate Debt as a Potential Amplifier in a Slowdown.” He applauded the deleveraging by U.S. households and financial firms since the Great Recession while sounding more concerned about debt levels of the U.S. government and nonfinancial corporations. He highlighted the notable growth in the lowest investment grade categories and pondered whether liquidity might be strained in a downturn due to changed funding dynamics behind corporate debt markets. He concluded that elevated corporate debt, primarily down the credit spectrum, could “amplify the severity of a growth slowdown” and increased levels of government and corporate debt make the U.S. economy “much more interest rate sensitive than it has been historically.” Minneapolis Fed President Kashkari told the state Senate’s Finance Committee “I don’t think we are yet at maximum employment,” and indicated that he is waiting “until we see wage growth really pick up,” to be convinced otherwise. He said he has “been amazed in the last few years how many Americans have come off the sidelines.” President Barkin from the Richmond Fed mostly avoided monetary policy in a speech on rural development, only giving a nod to the recent pick-up in wages.