Disappointing economic data and a lackluster projection from the ADP National Employment Report sent US equity markets tumbling as the dollar turned sharply down. The data puts a heavy emphasis on the US Department of Labor’s non-farm payroll report for May which is due to be released on Friday.
The Institute of Supply Management’s services index actually edged up in April rising to 53.7, up 0.6 from April. Analysts had projected a reading of 53.5. A reading above 50.0 indicates expansion but the index has turned steadily downward after a high of 56.0 in February of this year.
Most distracting was the news about the new orders component of the report. New orders hit their lowest rating since July of 2012, coming in at 50.1, down from 52.0 in March.
The ISM report data for services was stronger than the data for the important manufacturing sector, which enjoyed strong performance in the first quarter 2013. New factory orders climbed in April but not rapidly enough to overcome the slowdown in March.
Perhaps the most alarming data came from a report detailed a sharp decline in unit labor costs, which fell by 4.3 percent in the first quarter. This is the lowest rating in four years. Analysts projected that the sharp lowering was due to inflated prices paid in the last quarter 2012 that enabled companies to capture end of year tax benefits before the possibility of impending tax increases.
The ADP report only covers the private sector employment. The precursor to the non-farm payroll report showed the private sector added 135,000 jobs in May, which would indicate a non-farm payroll gain of about 165,000. This will be offset by heavy job losses in the public sector, many which job cuts will be the result of the sequestration. The ADP report also lowered the jobs for April from 119,000 to 113,000.
Reaction to the ADP Report
US equity markets have been ginger since Fed Chairman Bernanke’s last appearance before Congress when he hinted that the Federal Reserve’s easing may begin to gradually decrease. The announcement was met with resistance by the market.
Bad jobs numbers would figure to ensure the Federal Reserve remains active with its bond buying initiative, but Wednesday’s news was met with headwinds across all equity markets. By mid- afternoon, the DOW was down more than 195 points. The S&P 500 was down more than 20 points and the NASDAQ shed more than 40 points.
Chief Investment Officer of the Solaris Group in Bedford Hills, New York, Tim Ghriskey, offered an explanation of the sentiment that ran through the markets; “Not great. Bad news is good news in this market lately because it keeps the Fed accommodative, buying bonds and interest rates low. We’ve seen quite a run in rates as well, in other words yields up and prices down. This could be the type of number that maybe begins to reverse that somewhat.
“The employment gain was below expectations and below the run rate of the first quarter. The rest of it actually looks the same, most jobs came from smaller businesses, most came from the service sector. We continue to see expansion of the workforce, job market, but growth has slowed since the beginning of the year and it is pretty much everywhere.”
Most economists project a slowdown in the second quarter 2012 but the market has defied logic. The equity selloff indicates the underlying edginess of investors.
Another negative factor was the sharp increase in mortgage rates, which could dampen enthusiasm for the recovering housing market. 30-year mortgage rates climbed 17 basis points. 30-year mortgage rates increased to a national average of 4.07 percent, the highest rates since April 2012.
Demand for refinancing also suffered a substantial downturn with applications falling off by 15 percent. New loan requests, a measure of the demand for housing, fell 1.6 percent last week.
If the Friday non-farm report is below 165,000 new jobs, the market could react even more strongly.
US Dollar Plunges
The dollar, which has posted consistent gains against the yen over the past six weeks, slumped on Wednesday, losing about 1 percent and falling below the 99 yen mark. The dollar fell as low as 98.99 yen before rallying to 99.12 yen. Two weeks ago the dollar soared above 103 yen for a brief period.
Japan’s equities continued to gain strength as a result of the weakened yen and the dramatic improvement in liquidity afforded by the Bank of Japan’s newest round of easing. Japan’s retail sales continued to post strong gains. On May 23rd, the Nikkei reached a 5.5 year high soaring to a more than 50 percent rise in 2013.
The euro has gained ground since Bernanke’s congressional appearance. The European Central bank appears poised to stimulate growth and ease austerity measures. This condition caused the German 10-year bond to ease 1.512 percent, down from Monday’s 1.534 percent, the highest in three months.
The euro edged above the $13.0 mark and the USAD gave ground against a basket of currencies on Wednesday. US oil gained $0.79 to $94.09 per barrel.
