ADP employment figures could be less correlated with NFP this time

Fundamental View

Yesterday afternoon’s session saw the S&P 500 push below the $2000 handle on the back of surprisingly lower data readings across the board. We saw Factory Orders for November print lower at -0.70% vs the expected - 0.50% alongside ISM Non-Manufacturing Composite printing 56.2 against an expected of 58.0. This has resulted in mild dollar weakness going into the tail end of the US session, allowing the EURUSD to claw back some of its losses before returning to lower levels. The push lower in oil also aided the break of $2000 on the S&P, with energy sector stocks taking the brunt of the bearish assault. Ultimately we have broken back above the handle as European bourses have consolidated and are on the front foot this morning. As we saw Eurozone CPI expectations post higher core numbers than expected, we have seen market participants begin to attribute the fall in headline inflation, which fell to -0.20% against the expected -0.10%, to the fall in energy prices. Whilst this is a fair assumption it would be foolish of the Governing Council to ignore the red-flags being posted by the Eurozone’s member states. We have seen Crude push higher from the $47bbl handle, allowing stocks to reverse some losses.

Today’s View

Today’s main data was the Eurozone Inflation Expectations; this afternoon we have several key points in the form of ADP Employment Change for December and DOE US Crude Oil Inventories. Regarding ADP Employment we could see, for the first time, less emphasis on this number as the readings for November had great disparity with the resulting Non-Farm Payrolls number. Usually market participants utilise the ADP figure as a barometer for the Non-Farms release on the subsequent Friday; this breakdown in correlations between the two could leave traders wary of the number. A further thing to note was the ADP’s early release on Twitter several minutes before the main release. Traders are advised to monitor feeds and pay close attention to any potential numbers but as usual place less emphasis on these. A second area to consider with regards to ADP is the seasonal employment levels. Over Christmas many retailers hire large volumes of Temp workers which feature on the ADP reports. An example of this would be December 2012 with the ADP figure posting near all-time-highs just below 300k. The API Crude Oil Inventories last night came in with a large drawdown of 4 million barrels. Todays expected DOE numbers are a build of 750k barrels. Using the API numbers as a leading indicator today’s oil strategy will follow a long trade, taking into account the large downside already seen and the large drawdown in API numbers overnight. Heading into the end of the session we could potentially see this filter through into energy stocks and thus lead to a build in the S&P towards the European close.

Alternative View

The entry in crude is dependant on our assumption that lower API inventories will have a knock on effect in the DOE releases. This is generally accurate but please allow for any disparity in your appetite to take the trade on.