Solid ADP Jobs Growth, Jump in Wages and Salaries Keeps Fed on Path for December Rate Hike

The major U.S. equity markets are soaring shortly after the cash market opening on Wednesday. The tone was set early in the premarket session, but received a boost following the release of a private sector jobs report from ADP and Moody’s Analytics.

The ADP report showed private payrolls rose by 227,000 in October. This was better than the expected growth of 189.000 after September’s 218,000, was knocked lower from 230,000.

According to ADP, payrolls received their biggest boost from the services sector, which added 189,000 positions. Next was construction and manufacturing, which added 17,000 each.

Breaking the data down into industries, trade, transportation and utilities posted the biggest contribution with 61,000 new positions. This was followed by leisure and hospitality with a 40,000 position gain. Rounding out the total was professional and business services with 36,000 and education and health services at 31,000 new jobs.

The ADP report also showed that in terms of company size, big businesses that employ 500 or more workers added 102,000 jobs. Small businesses lagged, however, with just 29,000 new hires. This served as a sign that the tightening job market is making it difficult for small businesses to find qualified workers. Additionally, smaller companies are at a disadvantage because larger companies can attract more talent because of the ability to offer competitive wages and strong benefits.

Although many investors use the ADP report to gauge the strength of the U.S. Non-Farm Payrolls report, they can differ. On Friday, the U.S. Labor Department will release its October data on the labor market. It is expected to show the economy added 190,000 jobs this month, which would be slightly below the average 201,000 during the past 12 months.

In addition to the payrolls number, traders will get the chance to react to the Unemployment Rate which is expected to remain at 3.7%. Average Hourly Earnings are expected to increase 0.2 percent, versus a 0.3 percent rise in September. This number will be watched closely because the Fed uses it as a measure of wage inflation.

Labor Department Employment Cost Index

Another sign that inflation may be getting ready to rear its ugly head again was revealed on Wednesday when the government released data on third quarter wages and salaries.

According to the U.S. Labor Department, the employment cost index rose 0.8 percent for the third quarter, beating the estimate of 0.7 percent from economists surveyed by Refinitiv.

The breakdown showed wages and salaries rose 0.9 percent, well ahead of expectations for 0.5 percent. Benefit costs were up 0.4 percent.

Additionally, on a yearly basis, wages and salaries jumped 3.1 percent, the biggest increase in 10 years.

Fed Interest Rate Decisions

The Fed took a lot of heat earlier in the month from President Trump and CNBC’s Jim Cramer for raising rates too rapidly and being the cause of the initial weakness in the stock market. Looking at today’s solid labor market and wage data, however, indicates the Fed is on the right path so traders are likely to continue to price in a December rate hike of 25 basis points.