The Market Today
FOMC Expected to Hold for One More Meeting; ADP Again Points to Solid Labor Data
by Craig Dismuke, Dudley Carter
Today’s Calendar – ADP Report Sees 177k Private Payrolls in April, 237k Average for 2017: The ADP Employment Report for April projects private nonfarm payroll growth of 177k, in-line with economists’ expectations for the ADP report. Perhaps more interestingly, the March ADP figured was revised down from just 263k to 255k despite the BLS report showing just 89k private payrolls in its initial release. Often when the ADP report misses the BLS report by such a wide margin, the subsequent ADP report sees a large revision putting it closer in0line with the BLS data. That the ADP report was not revised meaningfully lower raises the likelihood of either a big April BLS report or a large revision to the March BLS data. Both scenarios would be seen as positive for the labor market, possibly increasing expectations for future monetary tightening. In fact, based on the ADP projections, they point to private job growth of 237k per month in 2017. For BLS’ data to match the ADP projections (over time, they do tend to average out), Friday’s report would have to show 435k private payrolls added cumulatively (whether that be in April or in the prior-month revisions). The ADP data had certainly set a high bar. Also released this morning, mortgage applications for the week ending April 28 fell 0.1% as refi apps fell 4.7%. However, purchase applications rose a solid 4.2% continuing the trend of reasonable housing data.
FOMC Statement Likely to Acknowledge Weaker Data but Keep June on the Table: At 1:00 p.m. CT, the FOMC will release its most recent rate decision. The markets do not expect a hike but do expect one at the June meeting. We will be watching to see how the Committee describes the economic conditions, particularly with recent reports on job growth, inflation, and GDP all disappointing. They are likely they see through the transitory nature of the weaker jobs and GDP reports and try to keep expectations high for a June hike. The most market-moving data from the meeting is likely to be released in three weeks – the Minutes – in which we will get more insight into portfolio discussions.
Overnight Activity – A Hint of Caution Amidst Oil Price Movements, Earnings, and U.S. Economic Data: European equities are mostly lower following mixed results in Asia with several key markets there closed for public holidays. U.S. equity futures are softer in response following yesterday’s marginal gains and disappointing earnings from Apple. Apple’s miss on revenue and iPhone sales have overshadowed better bottom-line earnings and shares are down more than 1% in the overnight session. With technology companies serving as the stalwart of strength in recent weeks, equity indices could go the way of the tech sector at the opening bell. Crude prices bounced off of what were near the lows of the year after an industry report projected an unexpectedly large draw of U.S. crude inventories. If confirmed by the EIA, it would be the fourth consecutive weekly drawdown; the first such stretch since December. Despite lower yields in Europe, Treasury yields are higher by just under 1 bp across the curve ahead of this morning’s economic data and this afternoon’s Fed decision.
Yesterday’s Trading – Auto Dealers Miss Drags on Yields, Stocks: Treasurys strengthened Tuesday as yields between two and 20 years completely erased Monday’s rise. The 2-year yield fell 1.6 bps as the 5-, 7-, and 10-year notes shed just under 4 bps in yield. Monday’s yield jump occurred after Treasury Secretary Mnuchin mentioned the possibility of the government extending its liability profile. But another economic data point landing on the softer side of the spectrum was enough to reinvigorate the bid for safer assets. Following weaker-than-expected reports Monday on personal income, ISM manufacturing, and construction spending, another monthly miss by U.S. automakers sparked the buying in Treasurys. The steepest drop in the 10-year yield occurred as Ford announced a 7.1% drop in April sales compared with a year ago (more below). However, disappointment in the auto sector (-3.0%) couldn’t keep the S&P from moving to within 5 points of a new all-time record high. The Nasdaq set its sixth record-high close in the last nine sessions.
U.S. Auto Sales Continue to Struggle: April’s auto sales data did little to rebut those who argue that the industry’s best days may be behind them, at least for now. Not only did activity decline from April 2016, the results were short of already dreary analysts’ estimates. General Motors, Ford, Fiat Chrysler, Toyota, Honda, and Nissan all posted YoY declines that were worse than expected. The April results poured salt into a wound created in last Friday’s GDP report that showed sales of autos and parts subtracted 0.5% from 1Q growth. The idea that activity in the auto industry has plateaued after a 2016 peak continues to gain ground. J.D. Power reported incentives hit a record (for April) of $3,499/unit. The speculation is that incentives will be forced to increase even more to help boost sales and reduce an inventory surplus. Automotive News reported that inventories grew to 4.2 million units last month, the highest in 13 years. If this trend keeps up, dealers may soon wish they had a DeLorean outfitted with a flux capacitor on the lot to take them back to the halcyon days of yesteryear.
Is Europe Turning the Corner? It’s Springtime for Investing in Europe (WSJ): “On growth, Europe is outshining the U.S. Eurozone data released Wednesday showed eurozone gross domestic product in the first quarter grew 0.5% from a quarter earlier. That equated to an annualized growth rate of 1.8%, versus the 0.7% recorded in the U.S. in the first quarter. Monetary policy looks set to remain extremely loose, further supporting the economy. … The bigger factor for investors in Europe may well be the recovery in inflation, and hence the better outlook for nominal growth, which translates into higher top-line growth for companies. After all, real gross domestic product has been growing steadily in the eurozone over the past few years, but that hasn’t been much help to stocks—until now. … A number of headwinds appear to have abated, with the recovery of commodity prices, a turnaround in emerging markets and a global recovery in inflation. The latter hit the eurozone hard, as it was at the center of the deflation scare … European political risk is fading, and should dissipate further if the second round of France’s presidential elections Sunday results in a victory for centrist Emmanuel Macron over euroskeptic Marine Le Pen. The chance of a flare-up in the Greek debt crisis has fallen too with this week’s deal with the country’s creditors.”