For January ADP said 246k private sector jobs were added, well above expectations of 168k and up from 151k in December. Of the 246k, 201k came from the services sector with the categories of ‘administrative/support services’, ‘trade/transportation/utilities’ and ‘health care/social assistance’ leading the way. Within the goods side, construction added 25k and manufacturing hired a net 15k. Natural resource/mining also saw job gains as the rig count has been increasing.
Bottom line, I don’t recall ever seeing such a discrepancy between print and estimate in this survey but ADP is saying there was seasonal issues with retail and moderate weather helped too. They believe the pace should still remain at about 175k per month. Smoothing out the figures puts the 3 month average at 204k vs the 6 month average of 184k and 12 month average of 181k. Was there a Trump effect on the number? Maybe but for now it’s so tough to quantify. Friday’s payroll private sector estimate if 170k. The US treasury response to the blow out number is somewhat muted. The 10 yr yield is up by 4 bps but only after falling by 4 bps yesterday. The 2 yr yield is up by 3 bps and back to where it was one week ago. As I said on Monday, the Fed should be raising rates today but of course won’t as they feel .625% is still the right rate. I do however believe they will set us up for a March hike while odds are only at 36% in the fed funds futures market.
The ISM manufacturing index for January rose 1.5 pts to 56 which was 1 pt above the estimate. It’s at the best level since November 2014. New orders were little changed at 60.4 vs 60.3 last month but is at a 3 yr high (same 12 of 18 industries that saw growth). Backlogs were still below 50 at 49.5 from 49. The backward looking production number was up 2 pts to 61.4. Inventories at both the manufacturing and customer levels remained below 50 with the former up 1.5 pts while the latter was down .5 pt. Export orders fell 1.5 pts but after jumping by 4 pts in December. The standout bright spot within the number was the Employment component which rose 3.3 pts to 56.1, the highest since August 2014 which follows the manufacturing job gain seen in ADP. But, there was only 10 of 18 industries that saw job growth, up just 1 from December. Also very notable was the 3.5 pt rise in Prices Paid to 69, a level not seen since May 2011. 15 of 18 industries saw this rise in price pressures vs 14 last month.
Bottom line, Trump optimism continues, especially due to hopes of lower taxes for those that produce goods in the US. Of the 18 industries surveyed, 12 saw growth vs 11 in December. The ISM said “comments from the panel are generally positive regarding demand levels and business conditions.” Again, I look forward to seeing to what extent this optimism filters into actual improvements in activity. We are seeing a further rise in bond yields in response to both the headline number and the prices paid component after seeing the strong ADP report. The 2 yr yield is up to 1.25%, up 5 bps on the day and just 2.5 bps from the highest level since 2009. The 10 yr yield is back above 2.50%. I reiterate my belief that today’s statement will set us up for a March rate hike. Yellen speaks to Congress on February 2015 and I think she’ll do the same then.
Bullish sentiment according to Investors Intelligence has made a new high post election. Bulls rose to 61.8 from 58.2 last week. That is the most since June 2014. Bears were about unchanged at 17.6 vs 17.5. The spread between the two at 44.2 is the most since March 2015. Those expecting a Correction fell to a 5 week low. As I’ve I been saying for the past month, the extreme bullish sentiment in this survey coincided with a market that has essentially churned since mid December. The Fed last hiked on December 14th 2016. The S&P 500 closed at 2272 on December 13th and finished yesterday at 2279.
Mortgage applications weakened w/o/w with purchases lower by 5.6% and are basically unchanged vs last year. Refi’s fell by 1.4% and are down 32% y/o/y. The average 30 yr mortgage rate rose by 4 bps and back to a 5 week high. Persistent 5% home price increases and now rising mortgage rates are not incentives for 1st time buyers to go out and buy a home.
The eurozone manufacturing PMI index from Markit in January at 55.2 was left little changed from the first print out last week of 55.1 but that is up from 54.9 and at the best level in almost 6 years. Markit said Austria, the Netherlands and Germany had the best performance while the “downturn in Greece accelerates.” Spain and Ireland also put in a good showing. Italian manufacturing confidence fell to a 2 month low. The continued improvement in the European confidence stats though is coming with growing inflation as “price pressures continued to intensify…with rates of inflation in input costs and output charges both gathering pace.” A weaker euro and higher commodity prices are cited for the main reasons but “there are also signs of demand running ahead of supply, which hints at a tentative build up of core inflationary pressures.” With Draghi walking back from the headline spike in inflation and telling us to watch core, this is potentially very relevant. Bond yields are back up across the board in the region.
Political worries ahead of the May French election has the 10 yr bund/10 yr oat yield spread at the highest in 3 years at 61 bps. The French 10 yr yield itself is up 6 bps today to 1.09%, the highest since September 2015. The business friendly candidate Francois Fillon is under major pressure to drop out on nepotism accusations. This election will most likely come down to Marie Le Pen and Emmanuel Macron. Macron is certainly the preferred choice.
The UK manufacturing PMI fell a hair as expected to 55.9 from 56.1. This is still a good level and future business confidence is at an 8 month high but Markit said “there were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroad slowed sharply.” Also as seen in the eurozone, “Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies link rising costs to the exchange rate. However, we’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel.” What is alarming and amazing is that we are seeing intense inflationary pressures in the UK and Mark Carney is still full speed ahead on QE and has short term rates at just 25 bps. What is he thinking? The 5 yr inflation breakeven in the UK is up to 3.30% and the 10 yr is at 3.45%, up 4 bps on the day. See chart on 10 yr breakeven, the highest since 2008:
China reported its January state sector weighted manufacturing and services PMI’s. Both were essentially unchanged m/o/m with manufacturing at 51.3 vs 51.4 and services printed 54.6 vs 54.5. It truly is impossible to separate what is real and what is credit stimulus juiced in China. There was little movement too in the other regional manufacturing reports. South Korea’s PMI fell to 49 from 49.4, Japan’s PMI was 52.7 vs 52.4, Indonesia’s PMI rose to 50.4 from 49, Thailand’s was unchanged at 50.6 and India’s got back above 50 at 50.4 from 49.6.