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Market Wire:
US Private Sector Payrolls Point to Sharp Hiring Slowdown

Matt Eidinger June 5, 2019

During a week replete with fears of an impending recession in the United States –fueled by bond yield inversions, new tariffs imposed on Mexico and a ratcheting up of the rhetoric in the ongoing trade dispute between China and the US – the private sector payroll report from Automatic Data Processing (ADP) compounded existing fears of a crisis ahead.

The report indicated private sector payrolls in the US rose by a meager 27,000 in April – far lower than expectations set near 183,000. The figures for April were revised down slightly to 271,000. Most losses came from small businesses, which a decline of over 50,000 jobs.

When examining the data by sectors, goods producing – lead by construction – declined the most. Service companies reported new hiring of over 70,000.

Hiring managers noted that hiring for May was the slowest since the economic expansion began ten years ago.

While not always an accurate indication of what hill happen in the government’s nonfarm payrolls report, which comes on Friday, the ADP private payrolls numbers are sometimes viewed as a proxy for Friday morning’s non-farm payrolls from the Bureau of Labor Statistics. Consequently, this morning’s data could be a warning sign of a weaker than expected data point on Friday as well.

A recent strengthening trend in the Canadian dollar continued Tuesday after dovish comments from Fed Chair Jerome Powell, who said that “… [the Federal Reserve] would act as appropriate to sustain the expansion.”

The spread between 10-year and 3-month US treasuries now stands at -23 bps. Likewise, last week the 2-year and 5-year yields both fell beneath 2% for the first time since January 2018.

While the spread between 2-year and 10-year treasuries remains at roughly 20 bps, it has narrowed from its average of 50 bps throughout 2018. Taken together, these signs from the bond market are a cause for concern, since they have typically preceded economic recessions in the past.

These fears are also at play in money markets, where the overnight indexed swap rates indicate the probability of an interest rate cut by the US Fed has now moved above 80% for the month of July – nearly 20 percentage points higher than it was only a few days ago.

These developments, coupled with the ongoing trade conflict between the USA and China, will likely pull the dollar in different directions. First, expectations of interest rate cuts, which are supported by recent inversion of the term structure of US treasury bonds, will likely weaken the US dollar’s strength. On the other hand, the trade conflict with China – and now with Mexico as well – will cause investors to flee to safe haven, including the US dollar, creating some upward pressure on the currency.

Bottom Line: This morning’s private sector payrolls were the weakest since the expansion began after the Great Recession a decade ago. The data add to concerns that are already looming over financial markets and causing bond and money markets to display warning signs that a recession is waiting around the corner.

Matthew Eidinger 
Fintech Specialist, Dealing Operations


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