The Market Today

Stronger-Than-Expected ADP Report Indicates U.S. Economy Added 253k Jobs in May

by Craig Dismuke, Dudley Carter

Today’s Calendar – May ADP Tops Estimates…Again: This morning’s ADP report was much stronger than expected, projecting the private sector added an impressive 253k jobs in May. The median estimate was for 180k new private jobs. The ADP report has now exceeded the median estimate in six of the last seven months by an average of 64k. Within the report, the services sector led the strength, accounting for 205k (or 81%) of the total new employees added. Professional and business services added 88k new jobs (versus 35k 12-month average), the most since April 2014. Trade, transportation and utilities companies added 58k (best of the year) and education and health services added 54k (best since September).  There was a net loss of payrolls in the leisure and hospitality sector for the first time in a year. Of the 48k jobs added in goods producing sectors, 37k of those came from the construction sector which has seen six months of notable strength in the ADP results. In addition to the solid may result, April’s initial estimate of 177k was revised down just 3k.


Looking forward to tomorrow’s official nonfarm payroll report, if the ADP report were to accurately predict the official private payroll number and the government sector were to perform in line with its 12-month average, total payrolls would equal 268k. The current median estimate is for 180k total payrolls. Over the last 12 months, the APD report has diverged (on an absolute value basis) from the nonfarm payroll number by an average of 57k. The ADP estimate has exceed the official number eight times and fallen short four times.


Initial jobless claims rose 13k (5.5%) last week to 248k, the highest level of claims since the week ended April 21. As a result, the four-week average ticked up 2.5k to 238k. Continuing claims data fell more than expected to 1.9MM. Despite the weekly increase in initial claims, jobless claims data remain positive.


At 9:00 a.m. CT, the ISM manufacturing Index is expected to show no change in May after falling to a 2017 low in April. The April index was dragged lower by disappointing declines in new orders (weakest since November) and employment (weakest since October). The Census Bureau’s construction spending data is expected to show activity bounced back in April after slowing in March. Throughout the day, auto sales for May will be release and are expected to show another month of slightly better MoM sales but a softer YoY result.


Overnight Activity – Economic Data and Oil Prices the Focus: The tone in global equities overnight was mostly positive as crude prices stabilized ahead of U.S. inventory data and the Dollar rose against most major currencies. Japan’s Nikkei led global gains, jumping 1.1% as the country’s May manufacturing PMI improved to its second highest level in several years. Capital spending in Japan for the 1Q topped estimates and corporate profits matched their best quarterly result since 2010. The results were not as positive in China where the private May Manufacturing PMI dropped more than expected, indicating activity contracted for the first time in 11 months. Also in China, the central bank raised the currency peg by the most since January to its strongest level against the Dollar in six months. In Europe, the Stoxx Europe 600 is up 0.3% and sovereign yields are mostly higher. Home prices in the U.K. fell for a third month in May, the first three month losing streak since 2008. The Eurozone’s manufacturing PMI was unchanged at a six-year high after revisions. After the strong ADP result, Treasury yields, equity futures, and the Dollar all moved to their highs of the day. The Treasury curve is just over 2 bps higher across the curve.


Yesterday’s Trading Activity – Equities Gain in May Despite the Treasury Curve Flattening on the Month and the Dollar Falling to Early October Lows: U.S. assets were little changed Wednesday as the major equity indices moved less than 0.1% (lower), Treasury yields fell less than 1 bp inside of 30 years, and the Dollar dropped 0.3%. Energy and financials continued to lead losses within the S&P. Energy companies lost value as crude prices fell 2.0% on the day. An after-hours report indicated government data on Thursday may show the largest drawdown of U.S. crude inventories this year. The Financials sector fell 0.8% thanks to a 1.7% loss in shares of U.S. banks. On the month, a 2.5% gain for the Nasdaq outpaced a 1.2% gain for the S&P and a 0.3% gain for the Dow. Treasury yields bounced off of session lows by the close with the 2-year note at 1.28% and the 10-year yield ending just above 2.20%. The net effect was the Treasury curve flattening to 0.917% between 2s and 10s, ending May at its flattest level since October 25. The Dollar weakened 0.3% on Wednesday to take May’s monthly loss to 2.1% and close the month near its weakest level since early October.


Beige Book Indicates Continued Economic Growth and Labor Market Tightening: The Fed’s May Beige Book indicated the economy continued to grow at a modest to moderate pace across the various 12 Fed Districts, although several Districts reported a slowing of activity since the last report in April. Consumer spending moderated with slower auto sales while most Districts continued to report moderate manufacturing growth and modest to moderate growth in residential construction and sales of existing homes. Consistent with recent readings on small business sentiment, firms reported they remain confident about the near-term but several Districts have seen that confidence ease. Most Districts indicated further tightening in the labor market with modest to moderate growth in both hiring and wages. Pricing pressures remain modest in most Districts but increasing input costs and tight housing inventories were credited with driving prices higher in certain pockets of manufacturing and construction as well as in new home listings.


April’s Pending Homes Sales Wobble, Wrap Up Weak Month for Housing: Pending home sales unexpectedly declined in April to complete a disappointing month for the U.S. housing sector. The 1.3% MoM decline in contracts signed on existing home sales was weaker than expectations for a 0.5% bounce back. On a year-over-year basis, pending sales declined the most since the summer of 2014. The trend in pending sales remains sideways (since the middle of last year) and offers little sign of any change momentum in pending sales. The story on housing continues to be a rinse and repeat; tight supply and price appreciation continue to outweigh some slight relief from the recent pullback in mortgage rates.

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