ADP Report Shows US Labor Market Continues to Firm

US Stocks fluctuated, Treasuries sold off and crude rebounded after the ADP Employment report beat expectations, bolstering the case for the Fed to hike interest rates this year.  Markets appear to be refocusing on underlying US fundamentals, which recent reports show have been firming ahead of Friday’s all-important nonfarm payrolls.  The ADP report showed new hires totaled 214,000 in February, easily beating economist expectations of 190,000.  The underlying data reiterated that the energy and manufacturing sectors remain underperformers, while the service sector continues to add strongly to payrolls. The February ADP tends to come in below the NFP for the same period, so Friday’s jobs number could surprise to the upside.

San Francisco Fed President Williams sounded upbeat on the US economy, telling the Financial Times that worries about an impending recession or financial crash are misguided.  Williams said the economy still needs “some accommodation” over the next few years, but that “gradual” rate hikes is the right strategy.  If the economy were to stumble, and additional stimulus was necessary, Williams would rather see the Fed use forward guidance and/or quantitative easing than negative rates.  Williams expects domestic demand to outweigh weakness abroad and that inflation will start to rise towards the Fed’s 2% target.

All three major US stock indexes are trading close to unchanged, while Treasury yields and swap rates are 1-4 bps higher across most maturities.  WTI crude recovered from earlier losses and is currently trading up 0.50%.