Wednesday, November 4, 2015
The major indexes are on track to start today’s session in the positive, with the in-line ADP (ADP) jobs reading raising hopes of a similar outcome from the key government jobs report on Friday, which has significant Fed implications.
Before we discuss this morning’s ADP report, let me give you the real-time scorecard for the Q3 earnings season that crossed the 400 mark for S&P 500 members following this morning’s reports from Michael Kors (KORS), Time Warner (TWX) and others. Total earnings for these companies are down -1.8% on -4.7% lower revenues, with 69.8% beating EPS estimates and 42.4% beating revenue estimates. As we have stated in this space before, this is weak performance than we have seen from the same group of 400 S&P 500 members in other recent periods. The overall takeaway on the Q3 earnings season is that growth remains problematic, particularly on the revenue side, and companies continue to guide lower which is causing estimates for the current period to come down.
This morning’s jobs report from payroll processor ADP matched estimates. This report, which serves as a preview for the all-important monthly non-farm payroll report from the U.S. government’s Bureau of Labor Statistics, showed gains of 182K in October relative to estimates of 185K and the prior month’s 190K gain (revised lower by 10K).
Estimates for the Friday BLS report, which currently stand at 190K per Bloomberg.com for the ‘headline’ and 174K for the ADP-comparable private-sector jobs, is about in-line with what we got from this morning’s report. What that means is that the ADP reading will likely have no bearing on market expectations for the BLS report.
Today’s jobs report is broadly within the monthly range of monthly gains over the past two years. As has been the pattern, the gains are concentrated in the service sector of the economy, with manufacturing continuing to struggle due to headwinds in the export markets and the weakness in the energy space.
In the aggregate, the services sector added 158K in October while goods-producing industries added only 24K. The construction industry had another very strong month, adding 35K positions during the month, while manufacturing lost 2K jobs. The construction strength is in-line with what we have been seeing in other housing related readings like housing starts and new home sales numbers.
The factory-sector ISM survey that came out on Monday was in-line with what we saw in today’s reading, which is that weak demand abroad and problems in the Energy sector are clouding the outlook for U.S. manufacturers. In terms of business size, large businesses (500 or more employees) added 29K jobs, medium-sized businesses added 63K, while small businesses with less than 50 employees in total added 90K jobs.
The key angle from which this report needs to read is the Fed, which surprisingly left the door open for lift-off at next month’s meeting even when the market had moved beyond that that timeline following the run of soft economic readings in the last few months. If Friday’s BLS reading replicates what we saw today from ADP — particularly if the BLS report is accompanied with positive revisions to the last two months’ numbers — then the odds of a December lift-off will increase from the current 50% level. The countdown to Friday’s report continues.
Sheraz Mian
Director of Research
Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.
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