The Market Today
Job Growth Weakest of Cycle; Fed Ready to “Act as Appropriate”
by Craig Dismuke, Dudley Carter
Job Growth Slows to Weakest Pace Since 2010 According to ADP: May saw the weakest month for payroll growth of the recovery/expansion according to the ADP private payroll data, adding just 27k jobs. The weakness was exacerbated by a slow month for construction but gives evidence that the uncertainty over trade policy is spreading outside the manufacturing sector, particularly to smaller businesses and the services sector. The smallest businesses (0-49 employees) lost 52k jobs while medium-sized business (50-499 employees) added just 11k jobs, both the weakest results of the cycle. Larger businesses (500+ employees) added a more-normal 68k jobs. Goods-producing jobs contracted 43k, including a 36k drop in construction jobs which was unlikely related to trade uncertainty. The service sector added just 71k, less than half its 12-month run rate. The ADP report portends a weak BLS report on Friday and is yet further evidence that economic stability is cracking under the pressure of so much uncertainty.
ISM Services Survey Expected to Fall to a 31-Month Low: Wednesday’s most important report, the ISM Non-manufacturing report for May, will be released at 9 a.m. CT and is expected to show a modest 0.1-point deceleration to 55.4, the slowest services expansion in 31 months. Two weeks ago, Markit’s flash services PMI fell more than expected to its weakest level since February 2016. The Markit report will be revised just prior to the release of the ISM results.
Fedspeak Set to Be Uneventful, But You Never Know: Three Fedspeakers are on the calendar to comment today, Fed Vice Chair Clarida at 8:45 a.m. CT, Fed Governor Bowman at 9 a.m., and Atlanta President Bostic at 10 a.m. Vice Chair Clarida in unlikely to swerve far from his remarks from Tuesday (more below). Governor Bowman, who is heavily focused on the community banking industry, will testify before a Senate committee. Bostic’s appearance is intended to be honed in on the housing sector. Also on the Fed, the latest Beige Book is scheduled to be released at 1 p.m. CT and will offer insight into what Fed officials are hearing from their business contacts about how increased uncertainty is impacting their businesses.
Yesterday – Stocks Soared on Hopes Fed Will Cushion the Economy from Negative Trade Shock: U.S. stocks rallied sharply Tuesday from more-than-two-month lows on hopes that Fed officials’ pledge to act appropriately in response to trade tensions means they are willing to cut rates if those tensions are affecting their mandate on a sustained basis. Fed Chair Powell said they are “monitoring” the trade developments and promised the Fed will “act appropriate to sustain the expansion,” a sentiment echoed later by his Vice Chair (more below). The Dow jumped more than 500 points, or 2.1%, while the S&P 500 gained a slightly smaller 2.0%. The Nasdaq rose 2.7% and recovered out of the technical correction it entered on Monday. All three indices posted their second best day of the year. Within the S&P 500, ten of eleven sectors rose with eight of the ten up more than 1%. Financials were among the top three performers as downward pressure on Treasury yields relented. A responsive Fed could help absorb the economic blow of a protracted trade war, and prevent a potentially more dire situation markets had seemingly been pricing in during recent trading sessions. The 2-year yield rose 5.2 bps to 1.88% as Fed Funds futures implied rates perked up. The 5-year yield edged up 5.4 bps to 1.89% and the 10-year yield added 5.3 bps to 2.12%.
Overnight – Stocks Rise and Yields Decline as Investors Keep an Eye on the Fed, BOJ, Italy, and Trade: Global stocks have improved Wednesday on the back of yesterday’s U.S. rally that analysts tied back to the Fed’s openness to ease policy if trade tensions slow down the U.S. economy. Chinese stocks were mixed after a private survey of its services sectors slipped more than expected in May to its second lowest level of the year. Japan’s Nikkei, however, climbed 1.8% to lead all global gains as the yen weakened and the 10-year JGB yield fell to -0.13%, its lowest level since August 2016. Traders say the shift was in response to price action in the swaps market equating to an expectation for the BOJ to cut rates by 0.10% within a year. Upward revisions to May PMIs for Germany and the Eurozone helped yields in the region shake off the drag from Japanese yields, but couldn’t counter concerns about EU actions against Italy. The EU published a report within the last several hours saying disciplinary action against Italy was “warranted’ due to their failure to remedy key fiscal concerns. Italian yields shot higher, reigniting a bid for German bunds that pushed the 10-year yield to a new all-time low of -0.22%. Before this morning’s ADP report, the 2- and 10-year Treasury yields were down 3.4 bps and 1.4 bps, respectively, and stock futures had strengthened 0.6%. After the surprisingly weak ADP result, the Treasury curve more than doubled those declines as expectations for Fed action strengthened, sending the 2-year yield to a new low since 2017.
Powell Said Fed “Monitoring” Trade Development, “Will Act as Appropriate to Sustain the Expansion”: As expected, Fed Chair Powell’s remarks focused on “longer-run issues that will remain even as the issues of the moment evolve.” On that front, Powell said the Fed takes “seriously the risk that inflation shortfalls that persist even in a robust economy could precipitate a difficult-to-arrest downward drift in inflation.” However, he noted that “Using monetary policy to push sufficiently hard on labor markets to lift inflation could pose risks of destabilizing excesses in financial markets or elsewhere.” When he did veer briefly to address those “issues of the moment,” he kept his comments somewhat down the middle. Powell said “we do not know how or when [trade] issues will be resolved,” but pledged that the Fed is “closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
Clarida Said Fed Would Act Appropriately if Trade Wars Slow the Economy More than Expected: After Chair Powell’s morning remarks, Vice Chair Clarida said the economy is in a good place and that he would tend to look through the price effects of tariffs. However, if the ripple effects of tariffs gave the Fed a sense that the economy was slowing, they would act appropriately to support their mandate. Clarida said if “growth is slower than we expect, and if we get the sense that underlying inflation is below where we want it to be, then as Chair Powell and I and others have indicated, we’re going to put in place appropriate policy to achieve those goals.” He went on to note that “Whether or not that means acting preemptively or when the data comes in is just going to depend on the context at the time.” Going further on the possibility of a preemptive insurance rate cut, he said “I’m not going to look into a crystal ball. I will look into the past. That has been in the monetary policy toolkit in the past.”
Revisions to March Weaken Capital Goods Data Trends: April’s capital goods order and shipments were mostly unchanged after final revisions made as part of the Factory Orders reports. Capital goods shipments were confirmed to have been unchanged in April, while orders were revised from -1.0% to -0.9%. However, the marginally positive revision to April’s orders was overwhelmed by a sharp negative revision to orders in March. The March estimate for a 1.4% gain was slashed to a much smaller 0.3% improvement, and not cushioned much by February’s 0.1% gain being notched up to 0.3%. Additionally, shipments in March were revised from unchanged to down 0.6%. The negative revisions to March place the trend for business investment in equipment on a much weaker trajectory heading into 2Q, adding to worries that uncertainty is weighing on business spending decisions.