Previewing Today's ADP Report

Today's otherwise key news event - the ECB rate announcement (which just printed at unchanged as expected) and press conference, will be trivial. As such, everyone is set to ignore the latest update from Mario Draghi, who courtesy of a $1.3 trillion liquidity injection since December has now largely wasted all his liquidity dry powder, at least until Spanish and Italian bonds are trading back at 7%, some time in the next few months. The result is that people like Citi's Steven Englander are saying to ignore the ECB, and to focus solely on the ADP (which has a horrendous predictive track record of the actual NFP print) report, to be released at 8:15 am, as it may be the only tradable hint ahead of the NFP report which as noted before is coming out on Friday, which is an equity holiday, although futures and bonds will be trading at the time of the release. More importantly, since the Fed now responds to economic data points in real time, a big miss to the consensus print of 206K will likely set the market surging as it will mean the Fed doves are back in control. Paradoxically, a meat or big beat, will be very market negative, as it will justify the withdrawal of liquidity support for at least 3-4 months, when the election fight will be in full swing, and Obama would be quite happy for another boost to the S&P in advance of November, and the repeat of the debt ceiling fiasco.

From Steven Englander:

Yesterday’s post-Minutes price action was impressive. FX investors essentially exited all positions, taking a narrow interpretation of the FOMC commentary. Given how dated the march FOMC meeting now appears, we would emphasize how readily incoming data could overturn yesterday’s market reaction. The FOMC did not signal that additional stimulus was imminent but there was a clear indication that it would be forthcoming if the economy weakened and that approach is consistent with Fed Chairman Bernanke’s speeches last week.

The ADP consensus is 206k.  Out of 37 forecasts only four are above 230k and four below 185k.

So the outcomes:

  1. ADP < 185k – complete unwind of the Minutes impact on FX. Investors would see the US economy edging into the slowdown that Bernanke hinted at, and a stronger case for more stimulus. The initial impact might be for the USD to strengthen on the risk-off view, but it seems likely that the prospect of further stimulus would be positive for asset markets and that there would be some risk buying once the knee-jerk reaction was done.  In the first instance JPY could move to the upside, AUD, CAD and EUR on the downside, but we think these could be reversed as FX investors re-engage with the possibility of further stimulus.
  2. ADP falls between 185k and 230k – in the range of expectations – probably not strong enough to keep full scale USD buying continuing but not a clear signal for a reversal either.  Muted reaction, with investors looking to see if there are any ECB surprises.
  3. ADP >230k – this would take us back to the 2005/06 range of outcomes and would be viewed as a s signal that the US recovery was for real. The Minutes would be re-scrutinized and the possibility of early Fed exit would be certainly be discussed in markets. Possibly very USD bullish because if the yesterday’s combination of higher US rates and fear of higher discount factors lead to a continuation of asset markets sell-offs.  Despite yesterday’s reaction, JPY looks vulnerable on this, but positions that are a) long and b) sensitive to higher rates would also be in pain.

Our economists are leaning to a softer payrolls outcome than the market, so we may be a leaning a little to the left on this one. Either way, in FX we would not underestimate the degree to which yesterday’s outcomes could be reversed or augmented by incoming data.


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