Pace of Job Gains Accelerate Thanks to Strong April ADP Employment Increase
Economic news and commentary for May 3, 2023
ADP Employment Report
The ADP Employment Report found 296,000 jobs were added in April with 229,000 created in the services sector and 67,000 added in the goods sector. Within the service sector, the leisure & hospitality industry once again led job gains with an addition of 154,000 jobs in April. In the goods sector, there was a notable weakness in manufacturing hiring as the industry saw -38,000 worth of job losses but this was offset by a bounce in hiring in the construction industry to the tune of 53,000. Gains in employment were seen across business size with the largest increases in small (121,000) and medium (122,000) sized businesses. Large businesses added just 47,000 jobs. Small business hiring is typically a good signal of the health of the economy, so as long as we see gains there, we can be confident that the economy is avoiding a recession. For some context, small businesses added 396,000 jobs over the last three months. In general and not just in small business, the trend in the labor market is strong. The 3-month moving average of job gains increased to 234,000 in April, up from 175,000 previously and the highest since October 2022.
In the pay insights section of the report, ADP reported a slowdown in wage growth for workers switching between employment opportunities. Job changers wage growth slowed from 14.2% YoY in March to 13.2% YoY in April which comes out to be the slowest since November 2021. Whether or not this is a reliable indicator for wage growth is still up for debate as this statistic from ADP is relatively new. Regardless, it confirms suspicion that the labor market is cooling. Job openings fell a considerable amount yesterday to about 9 million which suggests that the employment gains of the last few months are likely to be some of the last workforce additions that some businesses make. Indeed, the cooling of the labor market in the current cycle will probably manifest itself in the reduction of job openings rather than massive unemployment. Thus, the Fed would like to see further declines in job openings and wage growth in the coming months feeding through to calmer inflation. In this scenario, mass joblessness can be avoided in the process of suppressing aggregate demand through tightening.
Still to come…
9:45 am (EST) - US S&P Global Services PMI
10:00 am - US ISM Services PMI
10:30 am - US EIA Petroleum Status Report
2:00 pm - Federal Reserve Announcement
9:30 pm - Australia Trade
Morning Reading List
Australian retail sales grew 0.4% MoM and 5.4% YoY in Mar, down from 6.4% YoY in Feb.
Food: 1.0% MoM
Restaurants: 1.5% MoM
Household Goods: -0.4% MoM
Clothing: -1.0% MoM
Dept Stores: -0.2% MoM
India's Services PMI grew to 62.0 in April, up from 57.8 in March. This is the fastest output expansion since 2010.
Australia's Services PMI grew to 53.7 in April, up from 48.6 in March. Business activity increased at the fastest rate since April 2022.
The euro area unemployment rate fell to 6.5% in March, down from 6.6% in February. Total unemployed decreased -121,000 to 11.0 million. The youth unemployment rate fell -0.1 ppts to 14.3% or a decline of -14,000 in the number of unemployed youth.
US JOLTS
Job Openings March Lower (Wells Fargo) - Job openings fell by 384K in March to 9.6 million. Although still high, this was the lowest level of job openings since April 2021. The quit rate edged lower and the layoffs and discharges rate ticked higher, trends that are consistent with a labor market that continues to incrementally cool.
U.S. Job Openings Closing.... Sort Of (BMO) - It's ok! It's ok! Seeing the headline that "US job openings fall by more than forecast to 9.59 Million" is a good thing. Well, not normally but that is still over 9½ mln jobs available out there which, compared to almost 6 mln unemployed Americans.... well, that is still a heck of a lot of jobs available.
Construction Job Openings Trending Lower (NAHB) - The count of open, unfilled jobs for the overall economy declined again in March, falling to 9.6 million, after an 11.2 million reading in December, which was the highest level since July. The count of open jobs was 12 million a year ago in March 2022. The count of total job openings should continue to fall in 2023 as the labor market softens and the unemployment rises. From an inflation perspective, ideally the count of open, unfilled positions slows to the 8 million range in the coming quarters as the Fed’s actions cool inflation.
US
US Economic Update – May 2023 (NAB) - GDP growth slowed in Q1 to a sub-trend 0.3% q/q, but this was largely due to inventories, with domestic final demand growth strengthening. There were some positive signs in the March PCE inflation data – with underlying measures printing on the low side (by recent standards) but further low prints are required to confirm inflation is decelerating, particularly given still elevated wage growth. We expect the Fed to hike rates by 25bp at its meeting this week and then to pause (at a target range of 5.00% to 5.25%). However, until clearer signs of a deceleration in inflation emerge, the risk remains that the Fed will take rates higher.
Urgency in avoiding self-inflicted summer recession (EY Parthenon) - The debt ceiling X-date when Treasury will be unable to pay its obligations could come as early as June 1, according to Treasury Secretary Janet Yellen. While Treasury’s latest estimate is subject to a high degree of uncertainty, it will lead to growing financial market anxiety and add pressure on Congress to act rapidly.
Rates Spark: US regional banks cast long shadow over FOMC (ING) - It's far easier for the Fed to deliver 25bp today than to dare to hold. The latter would be a sign of concern. The former, one of conviction; but still needs explaining. Neither eurozone bank lending nor inflation made the case for a 50bp hike. Markets rightly price more ECB hikes but the end of the Fed’s hiking cycle will bring on aggressive ECB cut expectations.
Macro Insights: Banking sector dominos are falling (Saxo Bank) - Regional bank concerns were reignited in the US yesterday with no clear trigger on the timing as structural challenges still in focus and regulatory hand proving to provide only a short-term relief. Risks of further bank runs as well as exposure to commercial real estate continues to highlight the vulnerability of the baking sector and suggests further tightening of lending standards may be coming.
Controlled landing (EY Parthenon) - The Federal Deposit Insurance Corporation (FDIC) announced on Monday morning that First Republic Bank had been placed in receivership while JPMorgan Chase Bank would “assume all of the deposits and substantially all of the assets of First Republic Bank.” The FDIC and JPMorgan Chase Bank agreed to enter “a loss-share transaction on single family, residential and commercial loans it purchased of the former First Republic Bank.” This will entail an 80% loss coverage for seven years for single family residential loans and five years for commercial loans, including commercial real estate loans.
The Nexus Between Price Stability, Financial Stability and Fiscal Sustainability (Part 2): The Coordination Between Monetary and Fiscal Policy (BNP Paribas) - Traditionally, monetary policy focuses on price stability and fiscal policy on other objectives. When inflation is well below (above) target on a sustained basis, this separation of roles implies that monetary policy may need to become extremely accommodative (restrictive). Consequently, interest rates have a large cyclical amplitude, which may have undesirable consequences for the economy and put financial stability at risk. Simulations show that a coordinated approach between monetary and fiscal policy reduces the optimal cumulative amount of rate cuts (hikes). However, putting this into practice would probably be very challenging.
Europe
Euro-area flash inflation: Too high core inflation (Nordea) - Flash inflation for April came out in line with expectations. Thus, while the economic outlook is weak, core inflation remains too high and will keep the ECB in hiking mode for now. We see +25bp with hawkish comments on Thursday.
Eurozone BLS and inflation allows ECB to slow down to a 25bp hike (ABN AMRO) - Two important economic reports published today, the ECB's Bank Lending Survey and the April inflation report, make us comfortable with our view that the ECB will slow down the pace of rate hikes to 25bp on 4 May.
No quick wins: more jobs but little productivity in the Eurozone (Allianz) - The crisis-related damage to labor markets has not been as bad as expected amid changing consumer preferences and spending behavior. Employment has increased by 2.3% relative to pre-crisis levels, especially in France and Spain.
Dutch manufacturing industry under pressure of higher interest rates (ABN AMRO) - The Nevi Netherlands Manufacturing PMI dropped again in April, from 46.4 in March to 44.9 in April, showing that business conditions deteriorated further. New orders and output both fell faster, meaning that firms reduced output because of weak demand. Backlogs of work dropped at an even faster rate than in March, at a pace last observed during the pandemic and in 2012, after the financial crisis.
Swedish April PMI: Sluggish (Nordea) - The manufacturing PMI was unchanged at 45.5 in April, indicating that production will decline.
Turkey
Inflation in Turkey continues to fall (ING) - At 43.7% year-on-year, Turkey's April inflation print came in lower than the consensus forecast and continued its downward trend thanks to base effects.
South Korea
South Korea resumes positive GDP growth in early 2023 (S&P Global) - The South Korean economy returned to positive economic growth in the first quarter of 2023, albeit at a modest pace of 0.3% quarter-on-quarter. This followed a contraction in GDP of 0.4% quarter-on-quarter (q/q) in the fourth quarter of 2022. South Korea is expected to face continuing economic headwinds during 2023, due to the impact of weak exports and the cumulative transmission effects of monetary policy tightening by the Bank of Korea during 2022.
Electronics
Electronics sector reports greatest improvement in supply chains since 2001 (S&P Global) - Improving supply chains are helping global electronics companies fulfil backlogs of orders and stabilise production after substantial output losses incurred late last year. The supply of semiconductors, for example, is now almost back to normal.
Commodities
Oil slides (ING) - Oil prices continue to come under pressure with demand concern intensifying. All attention later today will be on the FOMC rate decision.
Outlook
Unclear economic picture difficult for central banks (Danske Bank) - The short-term economic momentum seems to be positive while the big picture is still somewhat weak and we have yet to see the full effect of interest rate increases and potentially also of financial sector problems.
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