US ADP Private Payrolls Falls

News and views

Risk markets settled back to a more neutral mood from the previous day’s sombre tone. The S&P500 closed down 0.3% in a lacklustre session, although the banks’ index lost another 1.9%. Oil and copper were largely unchanged, but gold took centre stage (probably lagging the previous day’s bout of risk aversion), gaining 2.8% from the Sydney close. US 10yr treasuries rallied by 10bp, paying more attention to the consensus-disappointing ADP payrolls report and the FOMC minutes. Fed members increased their confidence the US economy is bottoming, but added the recovery would be slow and beset by uncertainty, and the Fed Funds rate would stay low for an extended period. Signs are the G20 meeting tomorrow will be conducted in a similar spirit and reinforce the globe’s expansionary policies.

The US dollar lost ground after midday London, partially clawing back the previous day’s gains. EUR gained a cent to 1.4294. GBP outperformed from 1.6115 to 1.6300. JPY rallied from 93 to 92.11, talk of a strong option barrier at 92.00 halting the move.

AUD gained 1% to 0.8374, unsurprising following the positive GDP surprise yesterday. Influential columnist Terry McCrann last night wrote the figures support any RBA intention to hike, but won’t accelerate the timing of the first move.

NZD remained aloof from the soft US dollar theme, bouncing only modestly from its 0.6686 low to 0.6756, and consolidating around 0.6740. AUD/NZD recorded an impressive bounce off the bottom of the four month-long channel to the middle, to 1.2417.

US ADP private payrolls falls 298k in Aug. That is the fifth straight month of improvement. ADP has a recent tendency to understate the monthly change in (i.e. has not improved as much as) the official estimate of private payrolls, by as much as 169k back in May, so we see no need to change our forecast that total payrolls falls by 150k in August (–160k private, +10k govt), due out this Friday night. Still on the labour market, corporate layoff announcements were fewer last month, and indeed less than in August last year – more evidence that job market conditions are improving.

US factory goods orders were constrained to a 1.3% rise in July, reflecting upwardly revised durables (previously reported as up 4.9%) but a near 2% fall in non-durables, mostly due to lower energy prices pulling down the value of orders. Factory inventories fell by 0.7% at the start of Q3, down from Q2’s monthly average pace of decline of just over 1.0%.

US productivity growth was revised up slightly from 6.4% to 6.6% annualised in Q2, and so unit labour costs were revised to a slightly steeper fall of –5.9% annualised compared to –5.8% previously. All very minor stuff, following the very slight tweaks to the data in the second estimate of Q2 GDP growth.

The FOMC minutes for the 11-12 August meeting revealed growing confidence among committee members that the downturn is ending, although the recovery is expected to be gradual and vulnerable to any further shocks. The committee discussed slowing down the pace of their $1.45tn RMBS and agency debt purchase program, which is currently scheduled to run until year-end, but ultimately agreed that it wasn’t necessary to make a decision yet.

Euroland GDP growth was unrevised at –0.1% in Q2. The breakdown showed that household spending, supported by car scrappage schemes, turned modestly positive for the first quarter since early 2008.

UK construction PMI rises from 47.0 to 47.7 in Aug. The pace of contraction of the construction sector continues to diminish in the UK. With the factory PMI dipping back below 50 in yesterday’s August reading, all eyes are now on the services PMI for August, out tomorrow.

Outlook

AUD and NZD outlook today: These currencies have not technically confirmed either a readiness to move higher or the beginning of a post-March correction. The technicals (pointing lower) and fundamentals (pointing higher) are at odds, and leave us in a neutral stance until price action adds directional clues. Major support and resistance levels to watch are 0.8150 and 0.8500 for AUD, and 0.6630 and 0.6900 for NZD. Today’s data is second-tier – trade balance and services PMI in Australia, and ANZ’s commodity index update in NZ.