ADP report disappoints; a prelude of things to come on Friday?

Treasury prices are higher this morning in spite of a positive opening in the equities markets as the economic headlines were on the weak side of expectations. Currently, the 2-year note is trading flat yielding 0.19% while the 5-year note has gained 4/32 to yield 0.90%. The benchmark 10-year note is now trading 10/32 higher yielding 2.14% while the long bond has risen 17/32 to yield 3.49%. For the record, MBA Mortgage Applications, which measures mortgage applications for purchases and refinancings, showed that weekly applications declined by 9.60% week over week after falling 2.40% in the previous period.

According to ADP, private non-agricultural employment only rose by 91,000 in August; analysts were expecting a more robust gain of 100,000. Furthermore, the previous month’s data was downwardly revised to a 109,000 job gain versus the previously reported 114,000. Analyzing the data further we see that the biggest increase in jobs was in small firms (1-49 employees) gaining 58,000 followed by medium firms (50-499) which hired 30,000 new employees. The service providing sector gained 80,000 jobs for the period while good producing jobs registered a more modest increase of 11,000. Additionally, manufacturing jobs dropped 4,000. Although weaker than expected, this month’s ADP report showed that labor conditions continue to improve, though at an extremely slow rate.

The ADP report is considered a “whisper number” that investors read as indicative of what to expect from the Nonfarm Payroll report, scheduled to be released with the August unemployment rate on Friday. That being said, although this worse than expected ADP report gives investors an idea of what to expect on Friday’s Nonfarm Payroll report, it is also worth noting that some discrepancies between the two reports have increased recently (as seen in the graph below). Currently analysts are expecting Nonfarm Payrolls to increase by 70,000 versus the 117,000 gain registered in the August report. Meanwhile, the unemployment rate is expected to remain flat at 9.10%. Finally, Factory Orders, which tracks manufacturers' shipments, inventories, and orders (including non durable items) is scheduled to be released at 9:00 am CDT. Analysts are expecting this number to increase by 2.00% for July after a 0.80% drop in the previous period.