Robust ADP Job Gains in June Signal Strong Economic Resilience
Economic news and commentary for July 6, 2023
US ADP Employment Report
The latest ADP Employment Report has come in hot indicating a substantial increase of 497,000 jobs in June. This exceptional month of job gains adds to a series of positive employment reports, reflecting the strength and resilience of the economy. Breaking down the numbers, small and mid-sized firms emerged as key contributors to the employment growth, adding 299,000 and 183,000 jobs, respectively. Conversely, large firms experienced a slight decline of -8,000 jobs. The significant expansion in employment within small businesses is particularly noteworthy, as it demonstrates the economy's ability to navigate tighter financial conditions.
The goods sector also exhibited positive growth, with an addition of 124,000 jobs. Notably, the construction industry saw a surge of 97,000 jobs, highlighting the sector's resilience. This boost in construction employment can maybe be attributed to increased demand in the housing market, providing support for expansion in construction firms' activities. It is also worth noting that the manufacturing sector saw losses on the month, down -42,000.
Beyond the impressive job gains, the ADP report shed light on wage growth and its implications for inflationary pressures. Compensation growth showed signs of improvement, with the median annual pay change for job stayers at 6.4% year-on-year (YoY), slightly lower than the previous year's 6.6% YoY. Job changers experienced more significant progress, with a median pay change of 11.2% YoY, down from 12.1% YoY
While the data presented in the ADP report is undoubtedly noteworthy, it is essential to wait for the release of the Bureau of Labor Statistics (BLS) report tomorrow to draw definitive conclusions. If the BLS report aligns with the energy and momentum of the ADP report, it will almost confirm the likelihood of an interest rate hike in July. As market participants eagerly anticipate the BLS report, the strong job gains, wage growth, and resilience showcased in the ADP report bode well for the overall health of the economy. The consistent positive momentum in employment highlights the potential for continued economic growth and recovery in the post-pandemic era despite the Fed’s sharp tightening cycle.
Still to come…
9:45 am (EST) - US S&P Global Composite PMI
10:00 am - US ISM Services Index
10:00 am - US JOLTS
11:00 am - World S&P Global Composite PMI
11:00 am - US EIA Petroleum Status Report
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan Household Spending
Morning Reading List
Other Data Releases Today
Australia's trade balance grew $1.3 bil to $11.8 bil in May with exports up 4.4% MoM and imports up 2.5% MoM. General merchandise exports grew 2.3% MoM, and services exports expanded 2.3% MoM as well. Consumer goods imports jumped 7.7% MoM.
Manufacturing new orders in Germany jumped 6.4% MoM in May but were still down -4.3% YoY. The less volatile 3-month comparison showed that new orders were -6.1% lower in the period from March to May than in the previous 3 months.
The S&P Global Eurozone PMI fell at the sharpest rate in 2023 so far with a reading of 44.2 in June, down from 44.6 in May. The strong declines in new orders and activity lead to the slowest rise in input prices since March 2016.
Euro area retail sales were unchanged in May and down -2.9% YoY. Food sales fell -0.5% MoM, and non-food sales edged up 0.1% MoM. Auto fuel sales were down just -0.3% MoM.
US firms announced 40.7k job cuts in June, down -49% MoM but up 25% YoY. Employers have announced 458.2k cuts so far this year, a 244% increase from the 133.2k cuts announced through June 2022. It is the highest first-half total since 2020 (and 2009 before that).
The US trade deficit fell -7.3% MoM to $69.0 bil with exports down -0.8% MoM and imports down -2.3% MoM. Consumer goods are down another sharp -$4.8 billion, and industrial supplies also fell a sharp -$3.5 billion.
US
FOMC Minutes (June 13-14) — July Rate Hike Door Wide Open (BMO) - Presuming the upcoming employment and CPI reports continue the themes that bothered the non-voters and staff forecasters last month, we reckon the odds of a rate hike on July 26 are now even higher. We’re still calling for one.
Consumer Confidence Rebounds in June (NAHB) - Consumer confidence in June rose to its highest level in 17 months as recession concerns eased. However, spending plans were mixed. Vacation intentions continued to improve, while the intention to buy homes and big-ticket appliances cooled further due to elevated mortgage rates. This shift in consumer preference from goods to services is likely to continue this year.
Europe
Eurozone convergence: two steps forward, one step back (Allianz) - The European Commission’s new Economic Security Strategy could not have come sooner, with its focus on boosting Europe’s competitiveness and deepening the Single Market as essential elements for safeguarding the bloc’s economic security. The pandemic and the energy crises stress-tested the EU’s resolve in forming a strong political consensus. It emerged battle-hardened but severely weakened economically. Now the “European project” finds itself – yet again – at a critical stage of development that requires safeguarding its economic future amid rising geopolitical tensions and domestic pressures.
Bank of England survey raises hope of lower inflation (ING) - The Bank of England survey of corporate pricing plans contains good news, but June's 50 basis-point rate hike shows that policymakers are losing patience and confidence in these forward-looking inflation indicators. Expect at least two more 25bp hikes, but better news on inflation should allow a pause later this year.
Commercial Real Estate Market Stress Poses a Challenge to Banks (St Louis Fed) - A variety of factors—rising interest rates, persistent inflation, concerns about a potential recession and pandemic-related changes in where people work—have prompted concerns about the health of commercial real estate (CRE) properties and the bank loans that support them. Supervisors and economists at the Federal Reserve actively monitor CRE market conditions and the CRE loan portfolios of the banks it supervises.
Japan
Japan’s riposte to aging and productivity headwinds: robots with generative AI (Saxo Bank) - Japan’s expertise in semiconductor manufacturing and robotic integration could be the foundation of its dominance in AI. Combining the two most powerful market themes of this year, Japanese equities and artificial intelligence, brings a wave of opportunities.
Strongest Japan stock bull market runs (Saxo Bank) - Japanese stocks are up +100% since March 2020. The rally in Japanese stocks in 2023 has been broad based. What are the high-quality stocks we should investigate? High return on invested capital (ROIC) companies can be a good way to start with.
PMI
Momentum in global manufacturing weakens further (ABN AMRO) - Global manufacturing PMI drops to six-month low. Sharp easing of cost-price push pressures in global industry.
FX
U.S. Dollar Strength to Continue Until Inflation Beast is Quelled (TD Bank) - The U.S. dollar had an incredible run throughout much of 2022 as the Federal Reserve embarked on its historic rate hiking cycle to curtail the worst bout of inflation in forty years. With inflation pressures proving more persistent than anticipated, global central banks are poised to continue their rate hiking campaigns and keep policy rates higher for longer.
Outlook
ING Monthly: The economic twilight zone (ING) - For the global economy, the first half of the year was packed with action. The remainder of the year will see a further weakening of the global economy, a rapid fall in headline inflation, and a dearth of central bank rate cuts.
Research
Gazing at r-star: Gauging U.S. monetary policy via the natural rate of interest (Dallas Fed) - While estimating r-star is fraught with difficulty, the latest evidence suggests U.S. monetary policy likely turned restrictive at the start of 2023, after the Federal Reserve started raising rates in March 2022.
The Effects of Higher Borrowing Costs: Insights from Sovereign Default Models (Richmond Fed) - According to sovereign default models, debt becoming more expensive for a sovereign entity results in several significant effects. The government deleverages, capital investment falls for a prolonged duration, GDP and labor decline gradually with capital, and consumption can drop sharply. Outcomes are asymmetric, as positive shocks compress spreads slightly, but negative shocks can increase spreads substantially.
Deep Neural Network Estimation in Panel Data Models (Cleveland Fed) - In this paper we study neural networks and their approximating power in panel data models. We provide asymptotic guarantees on deep feed-forward neural network estimation of the conditional mean, building on the work of Farrell et al. (2021), and explore latent patterns in the cross-section. We use the proposed estimators to forecast the progression of new COVID-19 cases across the G7 countries during the pandemic. We find significant forecasting gains over both linear panel and nonlinear time-series models.
Crypto
Crypto Poses Significant Tax Problems—and They Could Get Worse (IMF) - Tax systems need updating to cope with crypto assets, whose anonymity and decentralized nature poses challenges—not least for the value added tax.
Green
Pace of decline in greenhouse gas emissions falls short of climate goals (ABN AMRO) - Several exogenous shocks have strongly influenced the GHG reduction trend in recent years. Two GHG reduction paths based on the historical trend clearly show that the pace of GHG reductions falls firmly short of the set climate targets in 2030 and 2050. A large amount of public and private sustainable climate investments are still needed to reach climate goals and get GHG reductions on track.
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