The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Head-scratcher.
Futures were up a little in the wee hours and also the premarket until a little before 8 AM. They implied about 5-10 points of downside briefly as we awaited June ADP (-33k vs +98k est & +29k prior revised from +37k). That shocking number suggests a quick and significant weakening in the US labor market. Puzzlingly, futures didn’t do much in response, nor did Treasuries. The S&P opened trading -6 and climbed into the green after about 30 minutes. The market added value slowly over the rest of the session, printing new all-time highs today. The yield curve steepened a bit but worried nobody and the Fed Funds futures price 65 bips of cuts in 2025, essentially unchanged from yesterday.
The weak ADP labor data *should have* inspired the bears and sent the bulls running for cover. It didn’t motivate anyone to do anything but the usual buying. This only makes sense if the ADP data is being set aside as a noisy oddity, reflecting some unknown dynamic, that *won’t* show up in the nonfarm payrolls data tomorrow (+110k est vs +139k prior). Markets are essentially saying, show me the nonfarms and *then* we’ll worry about what conclusions to draw.
I dislike it when the markets so confidently ignore certain data prints. It’s not for me to like or dislike though. This is the situation and it has precedent. There are many occasions where ADP implies something not seen in the official nonfarm data. Yet there are also many occasions where ADP effectively shows us what’s around the corner. Why the market picks and chooses its spots, is a mystery.
Our current outlook should be to weight tomorrow’s nonfarm data a little more than usual. This also means that the market impact will likely be greater than usual. Prior to today’s ADP, I thought nonfarm would be a ho-hum event. Now I think differently. If weakness shows up, the recession worry will jump. All the risk-off behavior, and psychological adjustment, that should have begun because of today’s weak ADP will kick in.
I’m not sure if a healthy number will trigger a strong rally though. We don’t really have worry to alleviate and a relief-rally to initiate. Maybe it’ll just be a green, all-systems go signal for the markets. That may be enough to spur a vault higher. I’m not confident on that though.
Anyway, tomorrow’s the last day of the week. I anticipated it would be a snoozer. With today’s ADP data shifting the collective mindset for tomorrow’s labor release, I think it’s a different ballgame.
Let’s see what kind of volatility shows up. I hope it doesn’t ruin the long weekend.
See you tomorrow.
-Mike
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