U.S. Data Looks Firmer as European Central Bank Backstops Sovereign Yields
- The ADP Employment Report for August showed an increase of 201,000 private sector jobs.
- Initial Claims for Unemployment Insurance fell by 12,000 for the week ending September 1, to 365,000.
- Auto sales for August improved to a 14.5 million unit annual rate.
- The August ISM Non-Manufacturing Survey’s Purchasing Managers’ Index increased to 53.7 percent.
- The August ISM Manufacturing Survey PMI ticked down to a weak 49.6 percent.
- The European Central Bank announced a new program of sovereign bond purchases.
U.S. economic data has firmed heading into tomorrow’s highly anticipated Bureau of Labor Statistics employment report, which will feature payroll jobs and the unemployment rate for August. The official August jobs data is particularly important as it will set the stage for the upcoming Federal Open Market Committee meeting on September 12th and 13th. A weak jobs report for August raises the odds of the Fed deploying additional monetary policy measures, possibly including quantitative easing and additional forward guidance. The unofficial ADP jobs report, put together by the payroll company, showed that 201,000 private-sector jobs were created in August. This raises expectations for a beat of the consensus forecast of +125,000 payroll jobs and an unchanged unemployment rate at 8.3 percent in tomorrow’s BLS report. The ADP number has tended to over-estimate the BLS equivalent lately, and so is consistent with a gain of about 160,000 in the BLS payroll survey and a one-tenth of a percent drop in the unemployment rate to 8.2 percent. Reinforcing the positive ADP employment report, initial claims for unemployment insurance decreased by 12,000 for the week ending September 1, to hit 365,000, a level consistent with moderate job growth.
Auto sales for August also beat expectations, increasing to a 14.5 million unit rate. This is a moderate gain from July’s 14.1 million units, but is still within the range set by the January and February sales numbers. A solid jobs report for August would increase expectations for a break-out auto sales number in September. The ISM non-manufacturing survey for August showed an increase to 53.7 percent, indicating expansion in the service sector. The ISM’s manufacturing survey for August showed a small decrease to 49.6, essentially unchanged over the last three months. The string of sub-50 readings for the manufacturing survey confirms cooling conditions for U.S. manufacturing, dragged down in part by weak global demand.
Today the European Central Bank announced that it will purchase European sovereign bonds with maturities between one and three years with the goal of stabilizing interest rates in distressed countries. There is no theoretical limit to this program and so it represents a firm backstop to European sovereign yields. The program will be fully sterilized, meaning that it will not increase the money supply of the European Union and so will not contribute to inflation nor tilt foreign exchange markets. The program is both a carrot and a stick for countries struggling to adhere to fiscal rebalancing. Noncompliance by EU member countries with recent budget agreements will result in a suspension of the purchases of that country’s bonds by the ECB, potentially exposing them to unsustainable sovereign debt payments. This action by the ECB does not directly address the deepening recession in Europe, nor does it solve the banking crisis or clear the way for a political process that unifies fiscal policy in the European Union. What it does is buy time for other policy actions and agreements and brings the distressed peripheral countries a step back from a potential exit of the EU.
Market Reaction: U.S. stock markets opened sharply higher. Treasury yields are up. NYMEX crude oil is up to $97.40/barrel. The dollar is down against the euro and up against the yen.
Click here for a PDF version of the Comerica Economic Alert: ADP 090612.