The Market Today
Substantial Further Softness in Payroll Recovery
by Craig Dismuke, Dudley Carter
Substantial Further Softness in Payroll Recovery According to Disappointing August ADP Report: August’s first look at private payroll growth from ADP disappointed expectations, adding to concerns that the Delta variant is slowing the pace of job recovery. ADP showed 374k private payrolls added for the month, below expectations for 625k payrolls. In addition to the August weakness, the July tally was revised down from 330k to 326k. It was expected that the July tally would be revised higher given the divergence between the ADP (+330k) and BLS (+703k) results. Comparing the spring (Feb. to Jun.) average monthly gains to the July and August data, every private sector has shown a slowdown in job growth, with the exceptions of IT and natural resources/mining. Goods producing sectors were adding 81k jobs, collectively, each month during the spring. They added just 45k payrolls in August. Services-providing sectors were adding 611k, collectively, each month, but added just 329k in August. The leisure and hospitality sector added 201k jobs, down from a spring average of 305k per month. ADP shows the leisure and hospitality sector still missing 2.4 million payrolls, only having recovered 69% of 7.7 million jobs initially lost. Combined with the disappointing early PMI reports for August, the across-the-board disappointment in the regional Fed indices, and a slowdown in some of the high frequency data; the ADP result only adds to concerns that the economy may be slowing. If this proves to be a good indicator for Friday’s BLS report, the jobs data may fall short of convincing Fed Chair Powell that “substantial further progress” has been achieved in the labor market.
Manufacturing PMIs and Auto Sales: The remainder of the day will bring several more important economic reports. At 8:45 a.m. CT, the August final Markit Manufacturing PMI is scheduled for release. While the overall level of the index remains high, the initial August estimate disappointed expectations, falling the most since the onset of the pandemic. At 9:00 a.m., the August ISM Manufacturing Index is expected to pull back from 59.5 to 58.5. August’s auto sales data will be released throughout the day with expectations for another decline in sales from 14.75mm units (annualized) to 14.50mm units. Already, sales have fallen 3.8mm since peaking in April as the sector continues to deal with a dearth of inventory.
YESTERDAY’S ECONOMIC NEWS
Delta, Inflation Hit Consumer Confidence More Than Expected in Conference Board Report: The Conference Board confirmed an earlier report from the University of Michigan showing a sharp drop in consumer confidence in August. The Conference Board’s headline index tumbled from 125.1 in July, revised down from 129.1, to 113.8, the sharpest monthly decline since April 2020 and the lowest level for confidence in six months. The present situation index fell almost 10 points as consumers’ assessment of business conditions deteriorated and a gauge of job opportunities, while still unusually high, cooled. The expectations index slumped by more than 12 points on weakness in expectations for those same indicators six months from now as well as a more cautious outlook for income growth. Plans to make major purchases moderated. The Conference Board singled out the Delta variant and “to a lesser degree” inflation pressures as key drivers of the August decline. One-year inflation expectations rose to a new high since 2008.
MNI Chicago PMI Pulls Back More than Expected: While still strong, the MNI Chicago PMI fell more than expected in August, echoing other regional economic surveys which have shown the expansion has checked up some since July. Consistent with the details in most other reports, production and new orders slowed, supplier delivery times continued to face delays, and prices paid for inputs remained elevated. Employment contracted again while orders backlogs increased.
Stocks Edged Down from Records But Post Solid Gains for August; Treasury Curve Moves Higher and Steeper: A small decline on Tuesday couldn’t keep the major U.S. equity indices from posting a solid gain for the month of August. After ending Monday at record highs, the S&P 500 slipped 0.13% while the Nasdaq inched lower by 0.04%. The Dow split the difference with a 0.11% decline. Nonetheless, the three indices ended August with respective gains of 2.9%, 4.0%, and 1.2% after stumbling with global equities in the middle of the month, in part on economic concerns caused by the spread of the Delta variant. Treasury yields rose Tuesday to steepen the curve, spurred along by even larger yield increases in Europe. European yields, already on the rise early in the session, added to those gains after an ECB official said the central bank should begin deliberations at next week’s meeting around slowing emergency asset purchases. Italy’s 10-year yield ended the day nearly 10 bps higher at 0.71% while Germany’s 10-year yield jumped 5.6 bps to -0.39%, both hitting their highest levels since mid-July. Treasury yields were more measured, with the 2-year yield rising just 0.8 bps to 0.21% and the 10-year yield adding 3.0 bps to 1.31%. Tumbling consumer confidence and another weaker-than-expected regional activity survey (more on both above) had little perceptible market impact.
Markets got off to a solid start for September with global stocks moving higher and Treasury yields rising ahead of this morning’s ADP report. While Asian indexes were generally stronger, mixed performances for Chinese equities capped a gain for a continent-wide index. A second manufacturing PMI pointed to a slowdown in factory activity in China in August. The private Caixin survey, tracking smaller- to medium-sized businesses fell into contraction for the first time since April 2020. Most other Asian-Pacific PMIs also softened, many still printing in contractionary territory below 50. European equities firmed, sending the Stoxx Europe 600 0.7% higher despite mixed regional economic data. Retail sales in Germany slipped more than expected after two strong months and mixed manufacturing PMI data resulted in a revision to the Eurozone’s manufacturing PMI from 61.5 to 61.4. Prior to the 7:15 a.m. CT ADP release, U.S. futures had recovered around 0.3% and the 10-year Treasury yield was 1 bp higher at 1.32%. The 10-year yield slipped lower and stocks added to their daily gain in the initial knee-jerk reaction to ADP. The 10-year yield was 0.2 bps higher at 7:30 a.m.