Data Remains in Focus As Fed Picks up Rhetoric

US stocks extended their declines while Treasuries fluctuated as mixed US economic data and hawkish comments from Fed officials spooked investors.  The ADP’s employment report showed US companies added 156,000 workers in April, the lowest level in three years, and well short of the 195,000 new jobs economists were expecting.  The ADP report acts as a preview for the more comprehensive and closely followed nonfarm payrolls report, due out on Friday.  Despite the weak ADP number, economists are still calling for the payrolls report to show 200,000 jobs were added in April.  While one month of disappointing jobs growth wouldn’t qualify as a new trend, it would be worrisome since the Fed is counting on a healthy labor market to spur wage gains.  A deeper look into the ADP data shows small businesses added the most jobs last month, growing at about the same rate as in March.  According to the head of the ADP Research Institute, one reason for that is “smaller businesses are less susceptible to global conditions, such as low commodity prices and the strong dollar”, which may have more negatively impacted hiring at larger companies.  In contrast, a separate report from the ISM showed the US service sector expanded last month, off the back of stronger new orders and employment.  The ISM print came in at 55.7, up from 54.5 in March, and easily beating the 54.8 print economists were expecting.  The strong number should help partially offset concerns about the alarming ADP print. 

Aside from the data, markets took note of hawkish comments yesterday evening from both Atlanta Fed President Lockhart and San Francisco Fed President Williams.  Lockhart said that a June rate hike is a “real option”.  Lockhart believes financial markets are underestimating the odds of Fed action in June, and that policymakers would be well-suited to “prepare the markets for at least a realistic range of possibilities” between now and the next meeting.  Similarly, Williams said he still believes the Fed will be able to raise rates this year, despite a disappointing first quarter.  He attributed the slow growth in Q1 to seasonality, and said he would support raising rates if/when data firms later this year.  The dollar has strengthened versus most major peers as a result.

It’s also worth noting that both Ted Cruz and John Kasich suspended their presidential campaigns, paving an unobstructed path for Donald Trump to win the GOP nomination.  All three major US stock indexes are currently down close to 0.75%, while Treasury yields and swap rates are 1-2 bps lower across all major maturities.