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EVERYTHING MUST GO: ADP, SERVICES PMI, FACTORY ORDERS, MORTGAGE DEMAND

Investors arrived at midweek to find a veritable clearance sale of economic data to choose from.

Starting with the labor market, the private sector added 122,000 jobs in May, a 16.2% monthly increase and 5,000 more than economists projected, according to payrolls processor ADP USADP=ECI.

ADP has a sketchy track record as a predictor of official government data, but then so do analysts, at times. At any rate the ADP print is 43.5% stronger than the 85,000 private payrolls increase expected from the Labor Department's more comprehensive jobs report, due on Friday.

"The report is slightly at odds with the JOLTS report released Tuesday, which showed stable but uninspiring hiring rates," writes Matthew Martin, senior economist at Oxford Economics. "While the full impacts of the war in Iran on the labor market haven't fully fed through, recent labor market data will allow the Federal Reserve to be patient in setting policy and remain on hold until December."

The graphic below tracks ADP's National Employment Index and measures its accuracy (or lack thereof) relative to Labor Department data.

Moving to the services sector, the Institute for Supply Management's (ISM) non-manufacturing purchasing managers' index (PMI) USNPMI=ECI showed business activity expanded at a slightly accelerated pace last month.

The index gained 0.9 points to print at 54.5, well above the 53.8 consensus and comfortably north of the magic PMI level of 50, the dividing line between monthly contraction and expansion.

Wandering into the weeds, new orders, production and inventories all accelerated, while imports and export orders weakened. The employment component sank deeper into contraction.

Prices paid - an inflation predictor - heated up by 0.6 points to an uncomfortably hot 71.3, its highest reading since August 2022.

"The dip in the employment index to 47.9, from 48.0, dragged the three-month average down to its lowest level in more than two years," says Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "That pushes back slightly against other indicators, such as today’s May ADP employment report, which hint at the labor market turning a corner."

As a reminder, the services sector typically accounts for around 90% of private sector job adds.

For its part, S&P Global issued its final take on March services PMI USMPSF=ECI, which printed at 50.7, a tad weaker than its initial "flash" reading of 50.9, and 0.3 points weaker than its final April number.

"The sluggish services economy is acting as drag on overall economic growth," writes Chris Williamson, S&P Global's chief business economist. "Hardest hit are the consumer-facing service sectors, where orders are now falling at the steepest pace since the pandemic in 2020."

"The increase in input cost inflation ... points to a further rise in consumer price inflation in the coming months," Williamson adds.

The S&P Global and ISM indexes differ from each other in the weight they apply to the various components (new orders, employment, etc).

Here's how closely they agree (or not). The dueling PMIs will visit the services side of the coin on Friday (S&P Global) and Monday (ISM).

Jumping over to manufacturing, new orders for U.S. factory-made merchandise USFORD=ECI jumped 4.8% in April, a bit stronger than analysts expected and marking a solid acceleration from March's upwardly revised 1.8% gain.

Once again, planes provided the lift.

Digging below the headline, a 165.9% surge in orders for commercial aircraft was responsible for much of the upside. Excluding transportation, new orders would have risen at a more sedate 1.3%.

The 1.0% drop in core capital goods - which exclude aircraft and defense items - bodes ill for corporate capex plans.

On the bright side, as shown in the graphic below, new factory orders appear to be pulling free from the $600 billion zone, where they have languished since mid-2022, a move which corresponds nicely with the ISM manufacturing PMI's return to expansion territory.

Finally, in the housing market the cost of financing home loans cooled down a bit last week. But so did mortgage demand, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate USMG=ECI - which tends to rise and fall in tandem with benchmark Treasury yields - shed 8 basis points to 6.57%.

"Still too high," seemed to be the general response of would-be borrowers. Demand for loans to purchase homes USMGPI=ECI - among the housing market's most forward-looking indicators - soured by 2.9%, and refi applications USMGR=ECI slipped 2.3%.

The 30-year fixed rate currently sits 35 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have increased by 6.3%, while refi demand has risen by 20.3%.

(Stephen Culp)

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