Today’s ADP nonfarm employment figure is the latest data point to confirm the downward trend in US hiring after a substantial deceleration in the pace of job creation. The ADP number, which printed at 169,000 against estimates of 200,000 is worrisome because it emphasizes that much of the recent gains in the unemployment rate can be attributed to weakening labor force participation, not the momentum of job creation. Furthermore, the revision lower for two prior months’ worth of data is disconcerting in that the overstatement of gains will notably impact the Federal Reserve’s plans to shift towards a more hawkish monetary policy stance.
Correlation between NFP and ADP
While generally speaking the correlation between the employment gains in ADP and Nonfarm Payrolls data from the Bureau of Labor Statistics is weak, a look at the trends of each indicator shows that ADP has been pretty successful in defining the trend for Nonfarm payrolls. In this specific case, the weakness of the ADP numbers have typically signaled weaker NFP figures, in this particular case highlighting the propensity for nonfarm payrolls on Friday to substantially underperform relative to whisper estimates of 224,000 jobs gained.
ADP Nonfarm Employment Change
Revised estimates from sell-side institutions will likely be published in the coming hours, with formidable adjustments to the downside also indicative of waning optimism toward any sustainable recovery in US macroeconomic fundamentals not driven by monetary stimulus. Our latest forecasts put the number closer to the range of 150,000-170,000 employees added in the latest reporting period and although modestly higher than the March figures, downside revisions to the prior month’s data are both to be expected and warranted.
Dent in Federal Reserve Outlook
The United States Federal Reserve is finding itself in quite the quagmire. After promising financial markets that this will be the year of an interest rate hike, the Central Bank’s credibility remains at substantial risk. Although initial expectations were for a June rate hike, that timeline has been gradually pushed further into the future, with the earliest indications showing the possibility of a September increase. However, without a supportive macroeconomic backdrop considering the weakness in employment and lack of inflation anchoring, raising interest rates even by a token amount to kill off any possibility of a rebound in growth momentum. More likely is a token move to increase the key rate by a few basis points instead of the routine 25 basis point denominations to which markets have become accustomed. Even then, the Federal Reserve might opt to reduce rates in the subsequent meeting to hold fast to its promise of continued accommodation.
Confidence in US Economy Belies Weakness
While much has been made of the gains in consumer confidence, this measure brazenly flies in the face of reality for much of the US economy. The key point in today’s ADP data was the loss of 10,000 jobs in the manufacturing sector during the month of April. The softness in manufacturing is likely due to the confluence of a stronger dollar, which makes exports more expensive combined with the downturn in global trade flows. The latest trade deficit is indicative that US production is suffering from the previously listed factors as the outlook is also shrouded in uncertainty. Factory orders less transportation grew at 0.00% and when combined with lacking capital expenditures and durable goods orders signifies that the supposed economic recovery is very hollow at best with no real catalyst to see sustained expansion. Even with equity valuations stretching to new heights, the divergence between financial assets and real economic metrics continues to widen.
US Factory Orders Excluding Transportation (MoM)
Dollar Dead-Cat Bounce Over
Haven assets will likely to continue to gain in coming sessions on the basis of dollar weakness and growing uncertainty for the US outlook based on the dismal first quarter GDP reading. Although the dollar was able to level off after several weeks of losses, the upside pullback has yet to gain traction, indicating that the correction in dollar strength has not concluded. Even when considering the determined efforts of the Swiss National Bank to ward off speculators and weaken the Franc through the implementation of negative interest rates, demand for Francs remains robust as evidenced by the recent losses in EUR/CHF and USD/CHF.
Precious metals have abandoned their historically strong inverse correlation with the US dollar, choosing instead to be more carefully follow the global inflation tides as an indication for the need to hedge against losses in purchasing power. Losses in the dollar typically translate to gains in precious metals, but downward pressure remains due to a myriad of factors including weaker physical demand from individuals. With employment momentum unlikely to reverse to the upside soon based on the latest figures, protracted losses in the dollar should be anticipated until macroeconomic data manages to outperform expectations.