This morning's labor market reports spell big trouble for non-farm payrolls pushing the U.S. dollar sharply lower as a result. According to private sector payroll provider ADP, only 38k jobs were created in the month of May, the smallest amount in 8 months. Although ADP has a poor track record of forecasting NFP, it has been fairly accurate directionally and if non-farm payrolls come anywhere close to 100k let alone 38k, the dollar will fall precipitously. The U.S. recovery is losing momentum and jobless claims have been on the rise, but no one expected such a weak ADP number, but severe tornadoes in the Midwest and supply chain disruptions halted production. Now we expect a rush of traders to adjust their NFP positions over the next few days, which will most likely add pressure on the U.S. dollar. The U.S. 10 year yield has already fallen to 3 percent following the ADP report to its lowest level since December. Challenger Grey & Christmas reported a smaller decline in job cuts which is also in line with weakness in the labor market.
With the service sector PMI report coming out after NFP, it will be very difficult for the dollar to recover in the next few days because there will be nothing left to suggest that non-farm payrolls may not be that weak. However it is important to remember the inaccuracy of ADP. The last time they reported such a soft number was in September 2010 and that month, private sector non-farm payrolls rose by 109k, more than 3 times the ADP report. However the last time we saw a drop similar in size was in May 2010 and that month private sector payrolls grew by 48k, which was a sharp slowdown from the 229k gain reported the previous month. Currently economists expect non-farm payrolls to increase by 180k and for private sector payrolls to rise by 209k. Given the big divergence between these expectations and the ADP number, volatility on Friday is a near certainty. In the meantime, we have manufacturing ISM and construction spending at 10am but we don't expect these numbers to lend much support to the greenback. All of the regional manufacturing indices declined which points to slower manufacturing activity across the nation.