Traders are always looking for signals and catalysts. One of the most significant market catalysts is the monthly payrolls report from the Bureau of Labor Statistics (BLS). It is typically released on the first Friday of the month, and market participants of all types are keenly focused primarily on the change in nonfarm payrolls. That statistic is perceived to be a key influence upon the Federal Reserve’s views about their progress in achieving the full employment portion of their dual mandate. Unlike many other key economic catalysts, this report routinely has a harbinger in the ADP Employment Change statistic, which typically precedes nonfarm payrolls by 2 days.
This morning’s ADP report appeared to be a blowout, with a reported increase of 807,000. That was nearly double the economists’ median forecast of 410,000. An eye-popping number like that immediately raises questions about whether estimates for Friday’s report remain appropriate, especially because that estimate is a similar 420,000. While we of course have no clarity as to what the BLS will report on Friday, we can offer some perspective on whether the ADP report indeed provides clarity for the upcoming BLS report.
The short answer is “not really”, as the graph below shows:
ADP Employment Change (white) vs. BLS Change in Nonfarm Payrolls (magenta), Monthly Since September 2020
A quick look at the two lines shows that they generally move together. But “generally moving together” is not a tradeable strategy. We see a few instances when ADP rose while BLS fell and vice versa. In April and September of 2021 we saw ADP rise immediately prior to a BLS fall, while in February, June, and July we saw the opposite, with ADP falling ahead of a BLS rise. There are also times when they moved in the same directions but with different magnitudes. Note the divergences in October 2020 and November 2021. In the former period, ADP portended a significant dip in the BLS report, but the decline was only slight. In November, the most recent report, ADP showed a slight dip ahead of a significant miss in nonfarm payrolls.
This is probably why the market response to this morning’s ADP report is somewhat muted. We see a 2-3 basis point rise in yields in the 2-30 year range. They may be indicating concerns that a strong payrolls report will harden the Fed’s resolve about reducing monetary stimulus and potentially raising rates, or that rising employment could spur inflation. As we noted on Monday, neither is a promising prospect for bond prices and consequently for mega-cap tech stock valuations. Traders appear to be rotating away from those stocks and toward more value-oriented sectors, but in an orderly manner.
It would be nice if we could have confidence that economists will correctly guess the number, but their track record is spotty too, as the graph below shows:
BLS Change in Nonfarm Payrolls (magenta), vs Median Economist Expectations, Monthly Since September 2020
We see that the economists generally got the direction correct, with notable exceptions in April and November, but the actual change in nonfarm payrolls was more volatile than economists anticipated. That is reasonable, since it is human nature to anchor expectations to prior results.
As of now, we will see who is correct – ADP, economists, or neither. Bear in mind that the S&P 500 Index (SPX) fell 0.84% after the shockingly weak November report but then rallied more than 3% over the next two sessions. After all, markets will do what they want. Economic statistics provide a valuable roadmap for investors, but the route isn’t usually straightforward.
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