Soft ADP Report Just Enough to Muck Up Non-Farm Payrolls Data

Be prepared for a two-sided trade shortly after the release of the headline payrolls number because some traders will play the hard number and others will try to factor in the “real” number with the GM workers taken out of the equation.
James Hyerczyk
Non-Farm Payrolls Uncertainty

Wednesday’s ADP private sector jobs report may have been another indication of a softening job market, but traders need to be aware that Friday’s U.S. Non-Farm payrolls report may not be as clear about the state of the jobs market because it is going to reflect the General Motors workers returning to their jobs following a strike.

This is important news to know especially for headline traders. They include discretionary traders who buy when the actual number comes in better than the forecast, and the “bot” programs whose algorithms are also set to read the over/under in a report.

Based on this phenomenon, traders should be prepared for a two-sided trade shortly after the release of the headline number because some traders will play the hard number and others will try to factor in the “real” number with the GM workers taken out of the equation.

It’s not something traders haven’t seen before. We see it often when there are several variables in an announcement. Sometimes we see it when a Fed rate cut is seen as dovish, but it issues a hawkish message in its policy statement.

In the Non-Farm Payrolls report, we’ve seen bullish headline numbers and bearish unemployment rate numbers. We’ve also seen bearish headline numbers and bullish average hourly earnings numbers.

I’m sure you get my point. The key is to be prepared and if trading the news on Friday, be ready to trade both sides.

Trade War Wears on Job Growth Trajectory

The trade war is taking its toll on the job market, and it now looks to be locked into a slower rate of growth, though still deemed as strong enough to support the economy.

According to Dow Jones, economists expect 187,000 jobs in the government report Friday, up from 128,000 in October. Refinitiv’s survey for November payrolls shows a consensus of 180,000 nonfarm payrolls.

Those estimates came out earlier in the week. Strategists are now seeing some downside potential for those forecasts, following ADP’s report Wednesday on private sector payrolls for November, which increased by just 67,000. The payroll number was well below the expected 150,000, and was the slowest growth since May.

Analysts’ Reactions

Immediately after the release of the ADP report, Goldman Sachs economists wrote, “The fact that job creation slowed ‘across all company sizes’ in the ADP panel also indicates some underlying weakness in November job growth.”

However, Grant Thornton chief economist Diane Swonk said she’s not changing her 175,000 payrolls estimate based on ADP’s disappointing number, which is not viewed as a consistent barometer for government payrolls.

“Both the ADP and the payrolls have been slowing since last year,” said Swonk. “We think that is the important take away.”

Mark Zandi, chief economist at Moody’s Analytics, said the job market is losing its “shine.”

“The slowdown is more significant than I would have thought, and I do think that goes to the trade war,” Zandi said on a conference call. “The trade war is doing damage to the economy and the jobs market.”

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