Strong ADP Report
The October ADP private sector jobs report showed 227,000 jobs were created as you can see from the chart below. This beat the consensus by a wide margin.
Consensus was 178,000 and the highest estimate was 200,000. Year over year growth in the BLS jobs report has been slowing which is slightly disconcerting.
It’s to be expected because the labor market is filling up. But if growth falls further, it will be a sign a recession is coming.
The jobs were mostly created by mid-sized and large companies. Small firms added 29,000 jobs. Mid-sized firms added 96,000 jobs. Large firms added 102,000 jobs.
This trend where smaller firms created fewer jobs was also prevalent in the small business ADP report. Small firms with 1-19 employees only added 7,000 workers. Other small firms with 20-49 employees added 22,000 workers.
This is the 2nd strong ADP report in a row. That could be good news for the BLS report on Friday. The past two October ADP reports showed consistency with the BLS number.
38,000 goods producing jobs were added and 189,000 service providing jobs were added. Trade, transportation, and utilities sector dominated this report. It added 61,000 jobs. The trucking industry has been in a labor shortage all year.
It’s a great sign for the economy for the transportation sector to be doing well.
The consensus for the BLS report expects there will be 190,000 jobs created and average hourly earnings growth of 3%. Which would be up from 2.8% in September.
Since the consensus expects 180,000 private sector jobs created, if the ADP report is matched Friday, the stock market should rally sharply.
Strong ADP Report - Strong Employment Cost Index
As you can see from the chart below, the Q3 employment cost index was up 2.8% year over year. It matches the Q2 report.
On a quarter over quarter basis, the ECI was up 0.8%. That beat estimates for 0.7% and last quarter’s growth of 0.6%.
The quarterly growth rate is the highest of the expansion which was matched in Q1 2018 and Q1 2017. Q2 2018 and this quarter both have the highest year over year growth rate of this expansion.
Wages and salaries were up 0.9% quarter over quarter which is also an expansion high which has been matched. The 2.9% yearly growth has never been matched this cycle.
Benefit cost growth fell from 0.9% quarter over quarter to 0.4% and from 2.9% year over year to 2.6%.
Overall, this report tells us what we already know. Wage growth is accelerating. The big test for the market will be what the BLS says. Above 3% average hourly earnings growth could have a big impact on the market.
Strong ADP Report - Facebook Helps Market Rally & Kellogg Crashes
Facebook has underperformed since July which means one of the market leaders was taken out.
On Wednesday, it regained its form as the stock rallied 3.81% on great earnings. Facebook has very little competition. This explains why I view it as a utility stock with growth.
As you can see from the chart below, the stories feature on WhatsApp and Instagram have more daily active users than Snapchat does. Facebook controls 3 massive platforms. These encompass all age groups. Older people use Facebook and younger people use Instagram.
Strong ADP Report - After a terrible month, October ended on a positive note.
S&P 500 was up 1.09%. Nasdaq was helped by Facebook as it was up 2.01%. Russell 2000 was up 0.32% and the VIX was down 9.08% to 21.23.
Even though the S&P 500 is up 2 straight days, the CNN Fear and Greed index is at 7 out of 100. This signals extreme fear. It has been in the single digits for a while just like during the correction earlier this year. I’m still very bullish on the near term, but skeptical of the returns in 2019.
Best sectors were technology and communication services which were up 2.39% and 2.1%. Facebook drove the latter sector higher.
Worst sectors were real estate and the utilities which fell 1.37% and 1.15% due to the ‘risk on’ trade ruling the day.
Kellogg stock drove down the consumer staples sector by 0.86%. The company picked a bad day to report as the defensive names aren’t in style. Kellogg stock fell 8.88% which was its biggest decline since October 1998.
The firm’s morning foods unit fell 1.3% in Q3. It lowered its full year earnings growth outlook from 11%-13% to 7%-8%. It’s very difficult to sell sugary breakfast items to customers since they are seeking healthier alternatives.
Strong ADP Report - Treasuries Not A Flight To Safety Trade
Both the 10 year yield and the 2 year yield were up 2 basis points to 3.14% and 2.87%. The difference between them is 27 basis points.
One of the most important aspects of the treasury market is that yields haven’t fallen much during the correction in stocks. The 10 year yield also rose during the volatility in February. Treasuries haven’t been a flight to safety trade. I don’t necessarily think that’s a bad thing.
Higher yields signal the economy is strong or inflation is rising.
The 10 year breakeven inflation rate has fallen from 2.17% on October 5th to 2.05% on October 30th. Real yields have stayed steady at 1.07% in that period.
This shows inflation isn’t the reason behind high rates. The biggest problem higher rates cause is weakness in the housing market.
Strong ADP Report - Conclusion
Stocks have bounced slightly, but they’re still wildly oversold. I’m very bullish in the short term as I view this as a normal correction.
Concern over rate hikes and tariffs is real though. If average hourly earnings growth beats estimates, the treasury market will sell off. Stocks might sell off sharply as well. It indicates the Fed will need to hike rates quicker in 2019.
In my opinion, the Fed will have hawkish policy after the rate hike in December which has a 73.9% chance of occurring.