Rates slip as ADP shows companies added fewest jobs in 9-years

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Published Date 6/5/2019

Huge day yesterday in the equity markets, overnight last night showed more improvement. At 7:00 am ET the DJIA was up +145 and the S&P added +15 from yesterday’s closes.

Weekly MBA mortgage applications were a mix; overall apps increased 1.5%.Refinancing applications were up 6.0% in the week, but not purchase applications, which fell 2.0%. Year-on-year, the purchase index is suddenly showing weakness with only a 0.5% gain. The housing sector has been moving higher this year, though improvement has been uneven. The purchase component is now down four weeks in a row.

At 8:15 am ET ADP reported private jobs increased just 27K with forecasts of +175K. April revised down 4K from original report to 271K. The 3-month average falling to 152K, the average for all of this year up +188K.  Initial reaction dropped the stock indexes a few points. The 10-yr before 8:15 was trading unchanged at 2.12% and fell to 2.10% on the release.  Small companies (50 or fewer employees) lost 50K jobs, the goods-producing sector lost 43K jobs, and construction jobs declined 36K.

Now on to the official jobs data from BLS. Until ADP the estimates were for non-farm jobs to have increased 180K and private jobs +175K. The unemployment rate was expected at 3.7% from 3.6%. The ADP data, if it is repeated on the BLS Friday, adds a big lift to markets’ new thinking that the Fed will lower rates. Yesterday Fed chair Powell and St. Louis Fed Bullard commented that the Fed is watching closely and increasingly concerned that there is no progress in the US/China trade discussions. Until the last three weeks, the general belief on Wall Street was that any trade war would be avoided, but that view is changing. While there is the possibility a deal will happen, that hope is fading rapidly. We believed it would take longer than optimists like Jamie Dimon and others were thinking, reflecting the markets overall sentiment. Then there are the Mexican tariffs dropped on markets last week by President Trump adding to the uncertainty; currently, there are a growing number of Republicans opposing his plan.

The IMF was out today lowering its forecast for China’s growth, saying the trade war with the U.S. is tilting the balance of risks to the downside. The world’s second-largest economy is forecast to expand by 6.2% this year and 6.0% in 2020, from 6.3% and 6.1%  from the previous estimate in both cases, the fund said at a briefing in Beijing. Also today the Wall Street Journal is reporting that the World Bank has lowered its global economic outlook from 2.9% in January to 2.6%.

At 9:30 am ETthe DJIA opened up +147, the NASDAQ added +55, and the S&P ticked up +15. The 10-yr stood at 2.10%, down -2 bps from yesterday.

At 10:00 am the May ISM non-manufacturing index was expected at 55.8 from 55.5 in April; the index increased to 56.9, the best read since February.

Market(s): volatility will increase over the next week or so. We don’t expect interest rates to increase much, but the potential of rates edging a little higher has increased. The bond market is technically overbought; the stock market equally oversold. Longer views are now are mixed with the Fed back in play to lower the Federal Fund rate and the obvious uncertainty about trade issues and tariffs. This morning’s ADP job report should keep markets in check until Friday when the official BLS report hits.

Source: TBWS

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