Blistering ADP Figure Sends Dollar Higher

Market Trends - 06/01/2016

In sharp contrast with estimates projecting weaker job creation in December versus the prior month, ADP reported private payrolls soaring higher in the latest reporting period, with nonfarm employment growing by 257,000 jobs in the latest period.  This figure beat consensus estimates of 192,000 while also climbing above the prior figure which was revised lower to 211,000.  Amid concerns that the Federal Reserve rate hike would tip the economy immediately into recession, these fears look unfounded at least in the near-term upon evidence of private hiring climbing.  While not necessarily highly correlated with Friday’s nonfarm payroll figure from the US Bureau of Labor Statistics, it does set the stage for further gains in job creation and a diminished unemployment rate.  Right now, estimates are pointing towards 200,000 gains for NFP for the month of December, however, this might be upgraded based on the latest available information from ADP, setting the stage for sustained gains in the US economy.

One of the main benefits of interest rate normalization is that it begins to force companies to invest in future growth and output instead of buybacks and cost cutting to keep afloat.  If payrolls continue to sustain the types of gains witnessed over the last few months, it could be a strong indication that the US outlook for 2016 should be upgraded despite the recessionary risk.  The kneejerk reaction to the news was not insubstantial, with the US dollar continuing to climb against a basket of currencies, strengthening towards multi-year highs. Most notably, the dollar is finding itself rebounding versus the Yen, with the USDJPY pair mainly on the retreat this week. In particular, the Yen carry-trade looks exhausted and is showing early indications of a greater unwind, especially in light of the Bank of Japan’s refusal to expand stimulus measures.  Any sustained unwind is projected to negatively impact a wide array of asset classes, particularly equities.  The one likely benefactor is gold, which earlier rose to the highest level since November.


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