It is an interesting time in the financial markets. The U.S. stock indexes are basically at or close to all-time highs, but the Federal Reserve tilted its tightening bias to neutral with a promise of no more rate hikes this year. After all, global growth was stalling and heading back down, and there has been no real sign of inflation. Zoom forward into May, and now the financial markets are wanting too healthy economic numbers — but not robust economic numbers.
Last week’s surprise of 3.2% gross domestic product growth was far better than the most optimistic of estimates, and now we have unemployment and payroll creations coming out on Friday. Ahead of the Department of Labor report due on Friday morning, we also get to a Federal Open Market Committee (FOMC) decision on interest rates.
What the market is going to want here is a solid jobs number that is also “not too solid” because the market does not want Federal Reserve Chair Jerome Powell and other members of the Fed to return to a more hawkish tone. It would (further) undermine the Fed’s fragile credibility, and the CME FedWatch tool was leaning more toward rate cuts by the end of 2019 or start of 2020 rather than more hikes.
ADP’s private sector payroll report just set the bar so that Wall Street now needs almost to fear a stronger than expected payrolls report on Friday morning. ADP reported that the private sector payrolls rose a sharp 275,000 in April. The services sector leads the economy, and it showed a gain of 59,000 jobs in professional and business services component and 54,000 in health and education.
The goods-producing jobs rose by 52,000 in April, and they were dominated by an additional 49,000 payrolls in construction.
Moody’s even tempered its tone about the “Peak Jobs” that it had touted at the start of 2019. The ADP report was also the strongest since last July. The view has changed from the economic soft patch showing that it did not materially affect hiring, although Moody’s maintains that the job gains overstate the economy’s strength, even if the numbers are making the case for a continued economic expansion.
Econoday has the following forecasts for this Friday’s key employment report from the Labor Department:
- Nonfarm payrolls +180,000 (prior 196,000)
- Private sector payrolls +178,000 (prior 182,000)
- Unemployment rate flat at 3.8%
- Participation rate flat at 63.0%
- Average hourly earnings +0.2% from prior month and +3.3% from a year ago
- Average workweek flat at 34.5 hours
There is a flip side to the expectations coming up so much. ADP is not a formal barometer for any exact numbers from the Labor Department. That said, it is used for directional bias. If the report comes out with much smaller gains than expected, then economists are going to be scratching their heads for some direction.
After a strong ADP payroll report on Wednesday, the market likely will set expectations a tad higher for the Labor Department’s Employment Situation report that will be released at 8:30 am Eastern Time on May 3, 2019.