ADP misses, ISM Services sets Record, Clarida could support end 2022 liftoff and more

A busy morning on Wall Street delivered a rollercoaster ride that saw economic growth concerns tentatively send the 10-year Treasury yields to the lowest level since February.  The deterioration to the short-term outlook was somewhat overdone given the ADP report has not been a consistent indicator of how well the private sector performs in the nonfarm payroll report.  A record ISM Service index, with a robust improvement with the employment component and along as prices paid surged to the highest level since 2005.  Fed Vice Chair Clarida prepared statement on the economy shows he is nervous over inflation and that rate liftoff in 2023 is consistent with the Fed’s new framework.  Fed’s Bullard also delivered another round of hawkishness, noting that inflation may persist more than some expect and that they could finish tapering by the end of the first quarter. 

The rally in Treasuries abruptly ended after a ‘one-two punch’ from a hawkish Fed Vice Chair Clarida and an impressive ISM services report.  The dollar was boosted after the 10-year Treasury skyrocketed from the session low of 1.13% to 1.20%.   

US stocks tumbled after Fed Vice Chair Clarida's hawkish comments reopened the door for a possible taper announcement at the Jackson Hole Symposium at the end of the month.  

Treasury

The Treasury kept the refunding auction sizes the same as the prior quarter but signaled they could reduce government debt issuance as soon as November.  Given the uncertainty over the debt limit, the Treasury stated, they are “not able to currently provide a specific estimate of how long extraordinary measures will last.”

US Data

The big miss with the ADP raised concerns that the delta variant is having a bigger impact on the economy.  Private companies only added 330,000 jobs in July, a huge miss of the 683,000 estimate, and downwardly revised prior reading of 680,000.  It is peak summer vacation time and leisure and hospitality only saw 139,000 jobs gained.  The labor market recovery is extremely uneven and suggests the economy continues to struggle in matching individuals up with the current job vacancies. 

A favorable seasonal factor could be in play for Friday’s report, so investors should not be stunned if the private payrolls portion of the NFP report does come near the 718,000 estimate. 

The ISM Services Index report erased traders earlier memory of a disappointing ADP report.  The service sector rallied to the highest level since 1997, employment surged, and prices paid rose to the highest level since 2005.  This report supports a taper announcement at Jackson Hole, which makes Friday's nonfarm payroll the most important economic data point of the month.  

Robinhood

Robinhood investors are rejoicing as meme stock mania returns.  A disappointing trading debut last week has been followed by big endorsements from Cathy Wood’s Ark Invest and massive retail bets that sent Robinhood shares as high as 81%.  This fervor won’t last much longer, but did provide a special opportunity for Robinhood early investors as all the other meme stocks are not having a good day. We’ve seen this movie before and this pump and dump of Robinhood will not end well for many traders.  Robinhood’s revenue streams will come into question once the government applies rules to payment of order flow.    

Oil

Crude prices remained heavy after the EIA crude oil inventory showed stockpiles unexpectedly rose last week.  The report was mixed as gasoline stockpiles fell more than expected, jet fuel demand roared back to highest levels since the pandemic began, while diesel demand declined.  US production was unchanged and that should remain the case given the downturn in productivity from Permian wells.

The current short-term demand hits from the delta variant should prove to be temporary and that will likely limit the decline in oil prices.  Crude was heavy earlier in the day following a softer-than-expected ADP employment change reading,       

Gold

Gold prices turned negative after hawkish comments from Fed Chair Vice Clarida and a robust ISM Services report that eased earlier concerns over the economy.  Gold was on the verge of breaking above key resistance following a big miss with the ADP report, but Clarida’s comment that a rate hike environment could be here by the end of next year gave Treasury yields a much needed boost.  The 10-year Treasury yield almost broke below 1.12%, which could have triggered technical selling towards the psychological 1% level.  Gold will likely consolidate just ahead of the $1,800 level leading up to the nonfarm payroll report. 

Bitcoin

Bitcoin is rallying after SEC Chair Gensler’s interview on CNBC outlined his logic in bringing regulation towards trading and lending platforms.  Gensler is not looking to shutdown Bitcoin but provide a better environment for investors and the technology.  Bitcoin was unfazed by the volatility in the bond market and that should prove to be supportive for prices long-term as the steepening of the curve accelerates.