The Market Today

ADP Reports Better Labor Market Recovery in May than Previous Data Indicated

by Craig Dismuke, Dudley Carter


ADP Reports Better Labor Market Recovery in May than Previous Data Indicated: The ADP employment report for May has finally given reason for optimism regarding the pace of job recovery after an onslaught of data and commentary pointing to slowing job growth.  At issue, as discussed in the Beige Book summary, has been a growing disconnect between job openings and people willing or able to re-enter the labor market.  ADP reported 978k new private payrolls, well above expectations for a gain of 650k. The strength was driven by gains in both goods-producing and service-providing sectors.  The leisure and hospitality sectors posted the strongest results, gaining 440k jobs as more economies re-open.

Jobless Claims Show Labor Market Improvement: Initial jobless claims for the week ending May 29 dropped more than expected, down from 405k to 385k. Initial PUA claims fell 17k to 76k, the lowest level since the program began.  Total initial claims fell 37k to 461k, again the  lowest since the onset of the pandemic.  Continuing jobless claims, however, disappointed expectations for the week ending May 22, increasing 169k to 3.77 million. Part of the issue appears to be a typical seasonality that brings a large number of workers back to work during the reference week which did not occur.  On a non-seasonally adjusted basis, claims only increased 23k with 16 states reporting increases.  Also adding to the headline disappointment was a large, 99k increase in California (+16% WoW).  In the pandemic programs for the May 15th reference week, PEUC (extension program) claims jumped 102k as Texas reported a 169k increase (+39% WoW).  Continuing PUA claims fell 147k, aided by a 210k drop in Michigan (-42% WoW).  The traditional extension program (not created by the CARES Act) saw an encouraging decline of 129k to 213k.  Total continuing claims for the week ending May 15 fell 366k to 15.4 million, the lowest level of the pandemic.

Service Sector PMIs and Fedspeak: The Markit services and composite PMIs for the month of May will be finalized at 8:45 a.m. CT.  Even more important to markets, the ISM Services index is expected to tick higher at 9:00 a.m.  There are several more Fed officials on the tape today: Bostic (11:30 a.m.), Kaplan (12:00 noon), Harker (12:50 p.m.), and Quarles (2:05 p.m.).


Global Rates Rise as European PMIs Pick Up and U.S. Labor Indicators Portend Strength Before Tomorrow’s Official Payroll Report: The S&P 500 meandered to a modest 0.1% gain Wednesday after erasing a stronger jump from earlier in the morning session. Energy again closed as the top performing sector with crude rising for a seventh time in its last eight tries. Over that span, the generic front month contract for WTI has gained nearly 11% and ended Wednesday at its highest level since October 2018. Prices have rallied despite OPEC’s plans to raise output in July, as the decision is being made only because demand is expected to remain strong as more of the global economy reopens. Elsewhere, there was a modest reversal across other sectors as tech shares recovered and most cyclical sectors unwound some of Tuesday’s strength. Treasury yields were lower heading into U.S. trading and remained lower by the close. The 10-year yield dropped 1.9 bps to 1.587%, near its low point for the day.

Thursday’s global session has so far seen lackluster performances by major equity indices as caution crept back in ahead this morning’s ADP payroll estimate and U.S. jobless claims report. Stocks were mixed across Asia, nudging a continent-wide index up to a modest gain. Europe’s Stoxx 600, however, was trading 0.8% lower at 7:30 a.m. CT as European yields moved higher. A round of services PMI across the region showed activity picked up last month, lifting the Eurozone’s composite PMI from a preliminary estimate of 56.9 to 57.1, its best level since February 2018. U.S. equity futures had registered declines of similar sizes as Treasury yields joined the move up in global yields. The 10-year Treasury yield rose to a new daily high after the U.S. ADP payroll estimate for May came in hotter than expected, and added to its daily gain after new jobless claims edged lower, again reaching a new low for the pandemic. At 7:40 a.m. CT, the 10-year yield was 1.7 bps higher at 1.604%.


Fed’s Beige Book Reflects Supply-Demand Frictions: The Fed’s May Beige Book said activity “expanded at a moderate pace from early April to late May.” The underlying tone was one of strong demand facing supply-side difficulties that, in some cases, limited activity. Consumer spending on travel and at restaurants was noted as a key strength and credited to “expanded vaccination rates.” Paired with solid demand, however, auto dealers faced tight inventories; manufacturers struggled to source materials and find workers; and construction continued to face rising costs. Despite the many current difficulties, the Fed’s business contacts remained “optimistic that economic growth will remain solid.”

Fed’s Beige Book Notes Steady Hiring Amid Supply Constraints: The Beige Book noted “a relatively steady pace of hiring” overall, but said “It remained difficult for many firms to hire new workers, …The lack of job candidates prevented some firms from increasing output.” Looking ahead, “Contacts expected that labor demand will remain strong, but supply constrained, in the months ahead.”

Fed’s Beige Book Signals Faster Inflation to Persist in Coming Months: “On balance, overall price pressures increased further” and “contacts anticipate…cost increases and charging higher prices in coming months.” “Selling prices increased moderately, while input costs rose more briskly,” implying margin pressures for some businesses. Some sectors, however, were able to “pass through much of the cost increases to their customers.” Prices for “construction and manufacturing raw materials, …freight, packaging, and petrochemicals,” were mentioned specifically, but increases were noted “across the board.” Supply chain issues “intensified costs pressures.”

Harker Said Fed Needs to Begin Tapering Debate: Philadelphia Fed President Harker said officials “need to start discussing” when it will be “appropriate for us to slowly, carefully move back on our purchases.” “We need to follow the playbook we had after the Great Recession,” he said, “start to taper…bond purchases slowly. …remove accommodation carefully and methodically” as the economy strengthens. He added, however, that the fed funds rate is likely to remain low for a long time. “Given current trajectories,” he said, “I anticipate the labor force returning to its pre-pandemic trend sometime next summer — it will be a while.” Stronger inflation pressures should fade, but “there is some upside risk.”

Fed to Begin Unwinding Secondary Corporate Credit Portfolio: The Fed announced Wednesday plans to “begin winding down the portfolio of the Secondary Market Corporate Credit Facility (SMCCF),” which held $5.2 billion of corporate bonds as of April 30 and $8.6 billion of corporate bond ETFs. The “SMCCF portfolio sales will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning.” While the New York Fed is expected to follow with more details, Bloomberg said a Fed official indicated the sales of securities from the SMCCF should be completed by the end of the year.

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