June ADP, Comes in Below Expectations

June's ADP release came in at -473,000, implying there could be some downward pressure placed on forecasts for tomorrow's payroll data. Currently, the market is forecasting a -350,000 change in payrolls; I believe we could see this number actually come in around -440,000, which is still much better than the six month average, but below current estimates.

US Week Ahead: It's all about the jobs!

Despite the shortened work week, we have a rather busy schedule of US economic data releases, climaxing with Thursday's US employment data. Last month's payroll data caught the market by surprise coming in well above expectations, demonstrating the lowest level of job losses since September 2008. But, the big question remains, was this start of a trend or a one-off anomaly. Other economic news in May sent mixed signals, fueling growing uncertainties, which led to a US treasury rally. What this means is that in many investors' minds this month's payroll data may hold the answer to that important question. Therefore we should expect a signifcant jump in trading volumes on the back of any surprises to that report, with an almost certain equity rally and US rates sell-off on better-than-expected data. However, the opposite is also true. Here is the rest of this week's economic calendar:

Monday June 29^th:

8:30AM: Chicago Fed National Activity Index (Risk: Neutral, Market Reaction: Marginal): The CFNAI is an index of 85 separate data sets designed to represent national economic activity and inflationary pressure. A reading of 0 indicates the economy is growing at the historical trend while a negative or positive result indicates the economy is growing below or above its historical average, respectively. Given the volatile nature of this index the three month moving average is typically quoted. This index remains somewhat obscure in the mainstream media and is likely to have a minimal impact on trading.

Tuesday June 30^th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downside, Market Reaction: Moderate): This weekly index tracks same store sales at major US retailers, and accounts for roughly 10% of national retail sales. Given recent data supporting an increase to the US saving rates, this index could face some downward pressure as people save more and spend less.

9:00AM: S&P Case-Shiller HPI (Risk: Neutral, Market Reaction: Marginal/Moderate): Despite, the significance of US home price data, this index holds a two month lag, meaning this June's data would actually be from April. This lag marginally reduces the index's importance compared to some of the other more timely housing market indicators. Nevertheless, large movements in this index could imply further deterioration or recovery of the US housing market, which could impact trading.

9:45AM: Chicago PMI- Business Barometer Index (Risk: Downside, Market Reaction: Marginal/Moderate): The Chicago PMI measures business conditions in the Chicago area; anything below 50 indicates a contraction while a reading above that level implies an expansion. According to Bloomberg, the market is currently forecasting a reading of 44.5. However, given recent weakness in the auto and manufacturing sectors I expect this number could disappoint. It will be important to pay close attention to the new order and prices paid sub-components. The new oders component tends to be forward looking, while the prices paid component experienced a 60 year low of 28.4 in April.

10:00AM: Consumer Confidence (Risk: Upside, Market Reaction: Moderate): The confidence index, which measures consumers' attitudes towards present and future economic expectations can be a good barometer for consumer spending. This index has recently experienced significant gains as consumers' seem to be focusing on positive economic releases. The current conditions index has remained somewhat stagnant, while the future expectations index experienced an increase of over 20 points last month. However, some deterioration in recent employment data could put some downward pressure on this month's release, but I still believe this index is more likely to surprise to the upside.

Wednesday July 1^st:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.

8:15AM: ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP employment report is typically considered a good indicator of the payroll data released later in the week, so a big swing in this data could shift expectations for the employment data released on Thursday and thus significantly impact trading.

10:00AM: ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The ISM measures national manufacturing conditions, a reading of over 50 signifies expansion while under a retraction. The current consensus on Bloomberg is 45. It will be very important to look at the new orders component of the ISM, which tends to be a forward looking indicator for the overall index. New orders finished over 50 last month, for the first time in 17 months, but will likely move back below 50 this month.

10:00AM: Construction Spending (Risk: Upside, Market Reaction: Marginal): This index tracks the value of new construction activity on residential, non-residential, and public projects. Recent stimulus spending should help drive up the public projects component of the index, and we will likely see a marginal increase in residential spending.

10:00AM: Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): A strong number in this index would help support the case of a recovery in the US housing market, which could have a moderate impact on trading. However, it is important to note that not all pending home sales turn into actual sales, but it is a good indicator of sentiment.

June Motor Vehicle Sales (Risk: Downside, Market Reaction: Moderate): Increasing savings rate, tight credit conditions, and a weak job market will likely cause car owners to extend the life of their current vehicles, despite incentive offers, reducing total car sales. This will also be exacerbated by what has recently been increasing gas prices. 7.4mn cars and light trucks were sold in May.

Thursday July 2^nd:

8:30AM: Employment Situation Report (Risk: Neutral, Market Reaction: VERY Significant): According to Bloomberg, the current market consensus for the change in payrolls stands at -350,000 with an unemployment rate of 9.6%. The average decline in payrolls for the six months preceding April was 643,000 versus 345,000 in May. The market will likely interpret another positive surprise as the beginning of a recovery in the US employment situation, which would lead to a strong rally in equities and selloff for US treasuries; a negative surprise would have the opposite effect. Nevertheless, the unemployment rate will likely drift above 10% in the comings months.

8:30AM: Initial Claims (Risk: Downside, Market Reaction: Significant): This report will be overshadowed by the payroll data, released simultaneously, but is an excellent forward looking indicator for the employment sector. We could see an unexpected jump in claims as the school year ends and teachers who have lost their jobs due to budget cuts begin filing for claims.

10:00AM: Factory Orders (Risk: Upside, Market Reaction: Moderate): Given the recent increment in durable goods orders we could see factory orders surprise to the upside. According to Bloomberg the current consensus forecast for May is a month over month increase of 1.4%.

Friday July 3^rd:

Enjoy the long weekend!

U.S. Week Ahead: ISM and Employment Steal the Show

Looking back to last week, as we expected the market was unable to maintain the upward momentum it experienced the week prior. This was due to weaker than expected data from the consumer sector and financial related news. The Dow and S&P500 ended the week down 1.17% and 1.08%, respectively, and we could have more bad news this week.

There is a significant chance we could see the probability of a 50bp cut rise this week after the ISM and employment data are released

Source: Cleveland Fed

This week has its fair share of important data releases; underscored by Tuesday’s ISM release and Friday’s pivotal employment report. We believe both of these indicators have considerable downside risks as the economy moves further into a recession. Here’s why, the charts below show the performance of the ISM and the change in nonfarm payrolls over the last 50 years (recessions highlighted in gray). As you can see from the charts, we haven’t begun to touch the lows for these indicators during a recession. In fact, over the past 50 years the ISM has averaged 42.6, while the change in payrolls has averaged -154K during recessions. To make matters worse, in nearly every case the ISM moved sub-40, while in every case the net change in payrolls broke -300K. As these indicators continue to deteriorate, it will become more apparent, that this crisis isn’t solely contained in the financial economy. However, we believe the Fed’s response up to this point has been the correct one for a slowdown in the real economy. This should help curtail long-term sustained losses in these indicators when compared to past recessions. Nevertheless, things will get worse before they get better.

ISM performance over the past 50 years (recessions highlighted in gray)

Source: BBerg

Change in nonfarm payrolls over the past 50 years (recessions highlighted in gray)

Source: BBerg

Let’s take a look at the some of the important indicators coming out this week in the US :

Monday March 31st:
9:45AM: NAPM-Chicago (Risk: Downside)- According to the consensus survey the market is expecting a reading of 46.0, compared to 44.5 the previous month. We believe the NAPM will continue to deteriorate as the economy moves into a recession.

TBD: Annual Crop Planting Report- The Department of Agriculture’s annual crop planting report is something I have never really looked at in much detail. However, this year investors are using it as an indicator towards the commodity. The report is considered a bellwether for farming in the year ahead. In any case, this report will likely have an impact in the commodities market, so keep an eye out. This report outline’s farmers intentions to plan crops; the USDA will release actual numbers in June.

Tuesday April 1st:
10:00AM: ISM Manufacturing Index (Risk: Downside)- The BBerg consensus survey is anticipating a release of 48.0 versus 48.3 the previous month. As we outlined in the text above we believe there are considerable downside risks to this indicator, given it has averaged 42.6 during recessions over the last 50 years.

10:00AM: Construction Spending (Risk: Neutral)- The consensus survey is anticipating a change of -1.1% m/m vs. -1.7% m/m last month. What will be important to look at in this release is the change in non-residential construction. Non-residential construction has remained resilient during the current crisis, but it has begun to falter. Last month private non-residential construction spending moved negative for the first time during this crisis, and we believe this may be the start of a trend.

Wednesday April 2nd:
8:15AM: ADP Employment Report (Risk: Downside/Neutral)- This release will be used to help gauge the change in Friday’s employment report.

10:00AM: Factory Orders (Risk: Neutral)- The consensus survey is anticipating a release of -0.6% m/m compared to -2.5% the month prior. Factory orders should continue to slow-down as the economy cools down.

Thursday April 3rd:
8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey the market is expecting weekly jobless claims of 366K. This number should remain within recession territory (+350K), which does not bode well for the overall employment situation.

10:00AM: ISM Non-Manufacturing Index (Risk: Neutral)- The consensus survey is anticipating a reading of 49.0 compared to 50.8 the month prior.

Friday April 4th: Employment Day!
8:30AM: Employment Report (Risk: Downside)- The BBerg consensus survey is expecting a 50K decline in non-farm payrolls and an unemployment rate of 5.0%. We believe there is significant downside risk for both of these indicators, and believe it is possible we could see a large spike in both (as we outlined in the text above).