ADP Employment Report Next to Show Weakness

• Treasury yields are near unchanged this morning, as are equities before the open. The President’s Congressional address last night didn’t reveal anything new or different on the fiscal policy front, so the market is turning its focus to the latest economic releases on employment (ADP) and the service sector (ISM Services) today. Currently, the 10yr Treasury is yielding 4.21%, unchanged on the day, while the 2yr is yielding 3.92%, down 3bps on the day.

 

• While Commerce Secretary Howard Lutnick alluded to a possible cut in tariff rates yesterday, which caused a brief rebound in equities, President Trump didn’t mention anything like that in his Congressional address last night. In fact, from a market perspective the speech last night didn’t reveal anything new regarding fiscal policy. So far, the Trump Put (relenting on tariffs in the face of steep equity losses) is still missing in action, but if there is more equity downside today, it just may appear.

 

• Today really begins the string of big data hitting the market and ADP has already released their February estimate of private payroll gains with a big downward miss at 77 thousand new jobs vs. 148 thousand expected and 186 thousand the prior month (adjusted up from 183 thousand). With the Friday BLS payroll report looming, and its current estimate of 170 thousand private sector jobs, today’s report may have analysts revising lower their estimates for Friday. However, we’re all accustomed to ADP missing big vs. BLS more often than not, so traders are likely to take today’s miss with a grain of salt.

 

• Also in the ADP report, Job Stayers saw incomes rise 4.7% over the past year which is flat from last month while Job Leavers saw incomes rise 6.7% which is a tick lower than the prior month. These levels were much higher in the go-go days following the reopening post-Covid so it continues to look like workers’ wage gains should not be a source of wage-push inflation. The BLS annual wage gains have been running around 4.1% which is also the expectation for February.

 

• Perhaps the biggest report of the day will be out at 10am ET with the ISM Services Index with expectations of a decent month at 52.6 vs. 52.8 in January. Recall, it was the S&P Global Services PMI last week that slipped into contractionary territory and was one of the catalysts for Treasury rallies on the view that growth was slowing in the one sector that had led the economic expansion for the last year or more.

 

• The ISM Manufacturing Index was released on Monday and while the overall reading was marginally positive (50.3 vs. 50.9) it was the Prices Paid component (62.4 vs. 54.9) and the Employment component (47.6 vs. 50.3) that led to more concerns over both growth and inflation. We’ll see how the ISM Services Index fares today in those readings.

 

• Tomorrow brings the weekly jobless claims series and with the spike last week, the market will be on pins and needles waiting to see if layoffs are moving decidedly higher, or if the prior week’s spike was a one off. Given the ongoing job cuts in DC, it’s hard to see the series heading lower to any great degree.

 

• That brings us to our view on all the reports this week that they may be a bit dated given the fast-moving events in DC. Even if the jobs report is strong, it will likely be waved off as stale news while a miss to the downside will begin another round of concern over economic growth with inflation still preventing the Fed from cutting rates any time soon. On that front we’re still with the majority of the market seeing a mid-year cut as the most likely.

---

Futures Predicting Rate Cut in June and 76bps by Year-End

---

 ADP Disappointed With Only 77 New Thousand Private Sector Jobs

Source: Bloomberg

---

ADP – Job Stayers and Job Leavers YoY Wage Gains Source: Bloomberg