Wednesday, July 1, 2015
Markets appear in a cheery mood on renewed hopes of a Greek deal following fresh proposals from the Greek government. The Greek headlines dominate while a strong ADP (ADP) jobs report this morning adds to the growing evidence of an improving U.S. economic outlook.
Market participants are reading the fresh Greek proposal as a sign that the tough-talking Greek Prime Minister has started to soften his position. The other side will justifiably read this as an admission that the PM’s referendum gambit may have misfired.
Nothing is final yet and the Germans reportedly aren’t thrilled with the new proposals either, with the German Chancellor reportedly stating that they weren’t ready for a ‘deal at any price.’ It isn’t clear whether the referendum is still on or not, but the market’s exuberance could very well be premature — a replay of the last Monday’s reaction to the first set of Greek proposals that ended up not delivering the goods.
It may not yet be clear how to make sense of the Greek situation, but there is no question about the picture of U.S. labor market emerging from this morning’s strong jobs from payroll processor Automatic Data Processing (ADP), which serves as a preview for the all-important monthly non-farm payroll report from the U.S. government’s Bureau of Labor Statistics. The ADP read came in a shade better than estimates at 237K for June vs. estimates of 230K and 203K in May (revised higher by +2K), with the monthly tally moving back above 200K after remaining below that level in March and April. T
his report will likely have no impact on consensus expectations for Thursday’s government jobs report; the consensus expectation for the BLS report is for ‘headline’ gains of 230K (per Bloomberg.com), which includes government jobs.
The June gains were concentrated in the service sector of the economy, with the bulk of the jobs coming from small and medium-sized employers. In aggregate, the service-providing industries added 225K in June, while goods-producing industries added only 12K. The Construction industry had another good month, adding 19K positions, while manufacturing added 7K jobs in June after losing jobs the month before.
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 June manufacturing ISM survey coming out a little later is expected to be give us a better read on the beleaguered manufacturing sector (the headline index is expected to improve to 53.2 from May’s 52.8 level). In terms of business size, large businesses (500 or more employees) added 32K jobs, medium-sized businesses added 86K, while small businesses with less than 50 employees in total added 120K jobs.
On a month-to-month basis, the ADP report can be out-of-sync with the corresponding government jobs report, as was the case the last two months. But in the long run, the two reports do move together. Both reports showed the labor market losing steam in Q1 as the economy lost momentum, but it appears that the government jobs report picked up the Q2 recovery quicker than the ADP survey. Today’s report is broadly consistent with the spring recovery that we have been seeing lately in weekly claims numbers.
The takeaway from this and other recent economic reports is that the U.S. economy is on track for a growth recovery in Q2 after the weak Q1 showing. The rebound has not been as strong as many were expecting, or what we saw in last year’s spring bounce-back. But it is nevertheless strong enough to give the Fed confidence to start its monetary policy tightening process in September.
Sheraz Mian
Director of Research
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