The Market Today

ADP’s Private Payroll Print Matches Estimates for 190k New Hires

by Craig Dismuke, Dudley Carter

Today’s Calendar – ADP Private Payroll Growth of 190k Matches Estimates: In the early data, mortgage applications for the week ended December 1 rose 4.7% on the back of a 9.0% jump in refinancing activity, the strongest weekly jump since July, following two big weekly dips to close out November. Purchase activity also picked up with applications rising 2.4%, compared with 1.8% the week before, and extending a run of increased purchase activity for a fifth week. The recent divergence in activity – weaker refis and stronger purchases – has pushed the four-week averages in different directions.


But more important was this morning’s ADP report. Private payrolls grew 190k in November according to ADP, matching exactly economists’ prescient projection. The gains were split on a roughly 80/20 basis between services-providing industries (81%) and goods-producing industries (19%) and roughly matched the 12-month average trend (services 79%, goods 21%). The manufacturing industry added 40k jobs (14k 12-month average) and accounted for all of the gains in goods-producing sector. Mining payrolls were unchanged and construction payrolls fell 4k (28k 12-month average) following a strong three-month run that added a total of 118k new payrolls. Services payroll growth of 155k was spread mostly across four industries: trade, transportation, utilities (+36k), professional and business services (+47k), education and health (+54k), leisure and hospitality (+25k). Jobs in the information industry fell 13K (third monthly decline, ninth in the last 12 months) and other services shed 2k, falling for the first time this year. Looking ahead to Friday’s nonfarm payroll report, if the government’s tally for private payrolls matches ADP’s (which is almost never does), and government jobs fall in line with the 12-month average monthly change of just over 4k, the nonfarm payroll total monthly change would fall right on top of economists’ estimate of 195k.


Also released this morning, nonfarm productivity was unchanged at 3.0% for 3Q, despite the stronger GDP revision from last week, as hours worked was revised up from preliminary estimates. However, the changed in unit labor costs was revised from +0.5% to -0.2% as the increase in compensation per hour rose at a slower pace than in the initial report. The disappointing wage indications reinforce the fact that the hourly earnings data in Friday’s payroll data will likely be the most meaningful piece of information.


Overnight Activity – Global Equities Continues Shaky Streak after Weak Lead from the U.S. on Tuesday: Equities in Japan and Hong Kong tumbled around 2% overnight to kick off a precarious Wednesday session for global equities. The losses were widespread across Asia and have negatively impacted nerves in Europe. The Stoxx Europe 600 is off 0.6% with several national exchanges falling even farther. Wednesday’s weakness was likely precipitated in part by the sharp reversal yesterday in the U.S. that erased early gains for the major indices (more below). Even with investors dumping their equity positions, traditional safe haven assets received only a modest bid. Sovereign yields are signaling a very minor flight to quality with the German 10-year yield down 0.8 bps and the Spanish 10-year yield up 1.0 bps. Before this morning’s ADP private payroll figure for November, the 10-year Treasury yield was 2.0 bps lower at 2.33% and had completely erased last week’s rise following the Senate’s passage of its tax bill. The 2-year yield was down slightly more, with the 2.0 bps drop pulling the yield just below yesterday’s close of 1.82% which marked a new nine-year high. U.S. equity futures were pointing to more modest pain and a return of the turmoil in technology shares that has the S&P’s tech sector down 4% since last Thursday. After this morning’s report, those trends remained unchanged.


Yesterday’s Trading Activity – Longer Yields Follow as Stocks Reverse Lower: The tables turned Tuesday as tech shares outperformed most other sectors, but a broad loss in momentum in the second half of trading left the three major indices moderately lower. After suffering steep losses Monday, the S&P’s tech sector reversed to tally the only positive performance of the 11 sectors. Telecommunication companies, which had led the index over the last several trading sessions as part of a tax-reform rotation, was Tuesday’s worst performer. Tuesday’s 0.37% loss for the S&P was its third straight daily decline, an accomplishment not repeated since August 10. In the Treasury market, the spread between the 2-year and 10-year yields crept down to a new nine-year low of 52.8 bps. The flattening occurred after the 2-year yield, which has risen in 19 of the last 25 trading days, added another 1.6 bps to 1.82% while the 10-year yield slid by a similar amount to 2.36%. The 10-year yield had risen overnight before a modest dip after a disappointing ISM report (more below) preceded a larger decline as equity momentum dissipated.


ISM Services Softens From Near Cycle Highs: The ISM’s report on non-manufacturing activity softened notably more than expected as several key component indices dropped back from near their strongest levels of the cycle. After touching a 12-year high in October at 60.1, the headline PMI cooled to 57.4 in November (expected 59.0). November’s 57.4 matched June’s PMI and equaled the median for the year. In the details, the four major indices that dictate the headline PMI – business activity/production, new orders, employment, and supplier deliveries – all eased. The monthly moderation across the board did surprise to the low side of expectations, but the reports continue to depict a steady (but slower) pace of expansion.

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