ADP setting expectations

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The market seems to have found a support area. Yesterday we hung around the supports, waiting for the next shoe to drop – either to rally or to see a continued sell off. It’s a waiting game for next FOMC meeting in October and as we wait – the market is coiled to move and will – when and if another Fed member makes a public statement about whether or not they will hike rates. Everyone has an opinion; even President Clinton talked about it and was glad they didn’t raise rates. There is another factor that will set the expectations, that is economic data. This week we have the Labor Report, but before we get to that we get a preamble of what it maybe via the ADP Private Sector Payrolls.

ADP setting expectations

Today’s ADP report will give us some resolution for the coming Labor Report this Friday, but the bigger question is will it change the expectations for the Fed’s possible rate hike in October or December?

The ADP Report showed the private sector creating 200,000 jobs for September, beating expectations of 194,000. August also showed a slight increase revision of 186,000. The service sector was the strongest job creation with 188,000, while goods production showed only 12,000.

While it is certainly better than expected, the broader concern is the job growth this year vs. last year. In 2014 we were averaging 239,000 jobs a month; in 2015 we have averaged (so far) 195,000 jobs a month. In September 2014 we added 252,000 jobs and saw some strength into the holiday season. Since 2011 we have been in hovering in the 190,000 to 240,000 average per month and growth seems to be stalling.

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        ADP National Employment Report: Private Sector Employment Increased by 200,000 Jobs in September<br /><br />

One has to begin to ask, are we at maximum job creation rate based on the current economic growth rate? How much of the job growth is based on Fed monetary policy and if the Fed starts to raise rates, will that curtail current job growth? Is the current decline in job growth a trend that the economy is slowing again?

Another issue that has been criticized is the amount of part-time vs. full-time job creation. We have seen on several occasions in which full-time jobs actually declined, while part-time jobs increased. While that is not the norm and not a frequent occurrence, any signs of strong part-time growth or temporary growth can give an artificial impression of a stronger labor market.

None of these issues are going unnoticed nor are they opinions, the Federal Reserve has frequently discussed and mentioned these exact issues and continue to level concern about the weakness in the structural labor market. Perhaps one reason they have removed the U3 Unemployment as a measure for determining interest rates is that low unemployment doesn’t equate to strong employment. The Fed has reflected concern about the participation rate, which is at decades low. They have also mentioned concerned about lack of wage growth.

While we are certainly out of the woods from the Great Recession, having created millions of jobs, and unemployment has lowered – all positive trends, we are far from getting back to a robust economy and strong structural employment.

Expectations for the Labor Report are 206,000 new jobs created and 5.1% U3 Unemployment rates. Those are both realistic numbers, but beyond the headline numbers are they structural sound numbers that the economy can build on? That is the question the Fed continues to ask themselves and so far they have NOT been confident to end their asset purchases or increase in the money supply and ultimately raise rates.

Support & Resistance

INDU 16,000
We look to see a bounce off the 16,000 level and we could see a move up to the 16,300 level. I think resistance will kick in around the 16,300 – 16,400 level. We maybe in a consolidation zone between 16,000 – 16,400 heading into the FOMC meeting.

NDX 4100
We are getting a bounce, but look for resistance at 4200. The tech sector has been mixed and I suspect big volatility to remain in this index.

SPX 1880
The S&P 500 hit a previous low area down in the 1880 level. We could get back up to 1920 and even 1940 before resistance kicks in. For now I don’t see any reason for a strong rally or for that matter a strong sell off, until we get some confirmation from the Fed – which will be at the October FOMC meeting.

RUT 1080
The Russell is telling us a rather depressing story. It is not seeing any strong bounce and is hovering around the lows. Getting back to 1100 is a possibility and if we can get there and close above it with any strength, this would show some confidence in the equity markets. I would look at 1120 as a short-term resistance level if we do get any strong rally.

The job numbers are certainly going to set an expectation and fuel the Fed rate hike debate. Strong numbers will raise expectations the Fed will raise rates, weak numbers will lower expectations of a rate hike, and numbers inline means the debate will rage on with no consensus.

ADP was better than expected, but this year’s job creation average is considerably weaker than 2014 and that is not bringing forth any confidence for the Fed to start raising rates. If we are to believe that jobs are a determining factor or major factor in rate decisions.

2 Responses to “ADP setting expectations”

  1. McRocket says:

    Thanks for this…I forgot all about the ADP numbers.

    Btw, look at the manufacturing numbers…down 15,000. Plus the Chicago PMI dropped below 50 last month.
    Manufacturing is definitely hurting lately.

  2. McRocket says:

    Sorry, the PMI drop was for this month…not last month.