ADP met our forecast but bulls overreacted

The ADP surprised the market showing a rise in employment in a private sector of 157k in June after a sluggish 36k in May. We suggested a strong reading in yesterday’s snapshot. Stronger ADP following a stronger than expected ISM is obviously a good sign – it means that the US economy is recovering more slowly but it’s not stagnating. However, market’s reaction was far too strong: S&P500 futures have already recovered more than 80% of the correction from May and June and price in an optimistic scenario in which economic growth resumes at the pace expected in early spring. The labor market data, while good, has little predictive value as the labor market is a lagging indicator in the economy. Leading indicators are pointing to a slower growth not only in US but basically in each major economy, perhaps with an exception of Canada (which actually benefits from higher oil prices). A strong payrolls report might carry the bulls to the fresh highs on the major global equity indices but we do not see a further upside potential in the mid-term (until the oil prices moderate and the confidence in a recovery among companies is restored).

OIL – back to 120 USD

Oil market reacted optimistically to the stronger data from US. The price of Brent breached an upper limit of the downward channel (we wrote about it on Wednesday) and that generated an additional buying signal, leading the price to as high as 118,80 USD. Technically fresh ’11 highs are now possible – the market completed a simple ABC correction and should be ready for a surge above 127 USD. While we cannot rule out such scenario (non-commercial investors assuming no obstacles to growth will expect shortages on the market and thus may go long once again) it has no macroeconomic basis. The (negative) impact of high oil prices on the global economy is apparent and while there are some limitations on the supply side atm., IEA and Saudis are making some efforts to increase it. Therefore we see a price of Brent closer to 100 USD in a medium term.

Events to watch – payrolls report

Thursday’s calendar was abundant with events and data releases yet the market focused nearly entirely on the ADP report. That shows how crucial the labor market data is for investors and consequently that the payrolls is going to dominate the end of the week. You might well forget about the official consensus: after the ADP the market expects a number in a range of 150-200k. The release is at 8.30 ET (14.30 CET). On a side note, one might have noticed that the dollar didn’t take advantage of the stronger ADP. While the market is quite certain that the Fed will stay put within the next few months, EURUSD is shaped in Europe atm.      

Przemysław Kwiecień PhD, Chief Economist

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