Soft ADP Jobs Report Supports Fed Rate-Cut Hopes

The Institute for Supply Management’s index of service-sector activity easily topped Wall Street’s estimate of tepid growth in May. Earlier, ADP estimated that private-sector firms added a softer-than-expected 152,000 jobs in May. The S&P 500 rose moderately after the data as investors weigh the implications for the Federal Reserve rate-cut outlook.

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ISM Services Index

The ISM services composite index jumped to 53.8, well above 50.7 estimates, according to Econoday. That followed an April reading of 49.4, signaling the first contraction since December 2022.

Readings above the neutral 50 level indicate an expansion in activity.

The business activity or production index leapt to 61.2 from 50.9. The new orders index picked up to 54.1 from 52.5. The employment index rose to 47.1 from 45.9, still pointing to lower staffing.

Separately, the S&P Global services activity index rose to a one-year high of 54.8 in May, up from 51.3 in April. The S&P report noted “higher wages for existing workers” driving a sharp increase in input costs.

The S&P Global U.S. composite index, including both manufacturing and services, jumped to 54.5 in May from 51.3 in April. The S&P Global manufacturing report was at odds with the ISM manufacturing index, whose Monday release showed an unexpected drop, signaling a slightly deeper factory contraction.

ADP Jobs Report

ADP estimated that private employers added 152,000 jobs in May, below estimates of 173,000, according to Econoday. April’s gain was revised down to 188,000 from the initially reported 192,000.

Firms with fewer than 50 employees cut 10,000 jobs. Large firms added 98,000 jobs, while mid-sized firms with fewer than 500 workers added 79,000.

“Job gains and pay growth are slowing going into the second half of the year,” ADP chief economist Nela Richardson said in a statement.

ADP showed that the goods sector saw a net gain of just 3,000 jobs. That came as manufacturing shed 20,000 jobs and the mining sector pared 9,000, while the economy gained 32,000 construction jobs.

Service-sector employers added 149,000 jobs. The bulk of job growth came from trade, transportation and utilities (55,000), health services and education (46,000) and financial activities (28,000).

On Friday, Wall Street expects the Labor Department to report a 170,000 rise in private payrolls and an overall gain of 195,000 jobs. The jobless rate and average hourly wage growth are seen holding at 3.9%.

ADP data isn’t seen as a reliable predictor of what the monthly employment report will show two days later. The two reports can vary widely on any given month but tend to match up over a longer period. Still, it’s not unusual for the S&P 500 to react to ADP data surprises.

Fed Rate-Cut Odds

After the ISM services index release, odds of a Fed rate cut by Sept. 18 eased back to 65%, where they stood before the softer ADP jobs report, according to CME Group’s FedWatch tool. Markets see 60% odds of at least two quarter-point rate cuts in 2024.

Rate-cut prospects have improved after a run of soft data, but it may take a cooler job market to give the Fed confidence that inflation won’t turn higher again. The ISM services index may ease concerns that economic growth is slowing too much.

S&P 500

The S&P 500 rose 0.2% in early Wednesday stock market action. The S&P 500 is aiming for a four-session win streak. On Tuesday, the S&P 500 scratched out a 0.15% gain to finish within 0.5% of its all-time closing high on May 21.

The 10-year Treasury yield, which had pulled back 28 basis points over the prior four sessions, edged down two basis points to 4.31% after the ADP jobs data. But the the 10-year yield firmed back up to 4.34% after the ISM.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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