ADP “Miss” May Actually Force Fed to Be More AggressiveThe ADP “miss” comes amid concerns that a tight jobs market could put upward pressure on wages and generate an inflation spike that would force the Federal Reserve to raise interest rates faster than the market anticipates.The minutes will provide traders with more details of policymakers’ outlook for the second half of the year.
The first major news event today was a miss with ADP and Moody’s Analytics announcing that private payrolls grew at a disappointing rate last month. Traders now have their sights set on ISM Non-Manufacturing PMI at 1400 GMT and the Federal Open Market Committee Meeting Minutes at 1800 GMT.
The ADP Non-Farm Employment Change report showed private sector jobs in the U.S. grew by 177,000 in June, below the 190,000 consensus estimate. This miss may encourage economists and traders to lower their expectations for Non-Farm Payrolls growth in Friday’s report. Currently, the headline number is forecast at 195,000, down from 223,000 in May.
If the NFP headline number is lowered to reflect the ADP number then this will indicate that economists and traders are actually paying attention to this week’s jobs report even though trading volume so far this week suggests there aren’t many players in the game at this time.
If volume remains low into the NFP report then expect fireworks early next week since traders will likely use the extended weekend to digest the numbers.
Investors should be paying attention to the ADP figures, however. According to ADP and Moody’s Analytics, June’s report marked the fourth straight month of jobs growth below 200,000. This news may have been offset, however, by an upward revision in the May number to 189,000 from 178,000.
The “miss” in the report was explained away by Mark Zandi, a chief economist at Moody’s Analytics. Zandi said, “Business’ number one problem is finding qualified workers.”
“At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.”
Should traders be nervous that a private sector jobs number “miss” will alter the plans of the U.S. Federal Reserve to raise rates at least two more times in 2018? I don’t think so. It may actually force the Fed to be more aggressive in raising rates.
The ADP “miss” comes amid concerns that a tight jobs market could put upward pressure on wages and generate an inflation spike that would force the Federal Reserve to raise interest rates faster than the market anticipates.
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U.S. Federal Reserve Meeting Minutes
At 1800 GMT, the Fed will release the minutes of its June 12-13 meeting. The minutes will provide traders with more details of policymakers’ outlook for the second half of the year.
At the last meeting, the central bank voted to raise its benchmark interest rate by a quarter-percentage point to a range between 1.75% and 2.00%. The Fed also released new economic projections showing a narrowing majority of them favored raising rates a total of at least four times this year, up from the three increases they anticipated in March.
In today’s minutes, traders will be looking for details on how the Fed intends to get neutral. Opinions ranged from 2.25% to 3.5%. The minutes could tell us about the degree of uncertainty over where neutral sits and how they might know when they get there.
The minutes may also tell us how officials are weighing the risks of letting unemployment fall further. Some FOMC members want to raise rates more slowly to keep the economy growing without overheating. Others may want to raise rates more aggressively to prevent inflation or asset bubbles.
Additionally, while Fed Chair Jerome Powell provided a bullish assessment of the economy up until mid-June, international risks have surfaced since then. Traders should look for signs of whether some officials cited such concerns as being critical enough to slow the pace of rate hikes.
Traders should also look for concerns from the FOMC about the tightening yield curve that could give indications of a looming recession. Finally, traders should also look for details on how the Fed feels about the Fed Funds rate spiking to the top of its range in May. The central bankers may have discussed how to prevent this in the future.