ADP greenlights million plus calls for Friday’s NFP, Debt ceiling concerns

US stocks are rising after solid economic data, calm in the bond market, and as the global economic recovery improves.  A private payroll report and a couple of Service index readings suggest the US economic recovery continues but not at a breakneck pace.  The next big catalyst for equities is that the US needs its allies to also win the fight against COVID and that will take time. The gains abroad are greater as the recovery potential in Europe far exceeds what is left for the US.

ADP

Data watchers mostly agree that historically a link does not exist between ADP and the nonfarm payroll report.  During most of the COVID-19 pandemic, ADP report has mostly underperformed the official private payroll numbers.  The April ADP payroll report showed 742,000 jobs were created, a miss of the 850,000-consensus estimate, but still a strong improvement from the upwardly revised prior reading of 565,000.  This ADP report supports calls for over a million jobs created with Friday’s nonfarm payroll report.  Some forecasts for Friday’s nonfarm payroll number are as low as 700,000 and high as 2.1 million.  The closer the US economy is to recovering all lost jobs due to COVID, the sooner the Fed will be forced to start talking about tapering asset purchases. 

ISM Services

Economic activity in the service sector continues to remain robust, albeit at a surprisingly slower pace.  The April ISM services reading of 62.7, was a miss of the 64.1 consensus estimate and decline from the 63.7 prior reading.  The respondents voiced concerns over finding and retaining labor, supply chain challenges, and pricing pressures.  The US economy is roaring but Wall Street will have trouble shaking off persistent pricing pressures.  Prices paid rose 2.8 points to 76.8 and this theme will not be changing anytime soon. 

Debt ceiling

Treasury yields initially spiked after the Treasury Department provided its quarterly funding announcement that included a warning over the debt ceiling.  The Treasury will offer $126 billion of Treasury securities to refund approximately $47.7 billion of privately-held Treasury notes and bonds maturing on May 15, 2021. 

The Bipartisan Budget Act of 2019 suspended the debt limit through July 31, 2021 and now Congress will have to debate whether to raise or possibly suspend the debt limit.  The Treasury is evaluating scenarios on the debt cap but financial markets should not be too worried since Democrats still control Congress. 

The US is not going to default on its debt, but financial markets will not be fully relieved until we hear from conservative Democrats that they will support raising the debt ceiling.  In 2011, the Obama administration almost saw the US default as Republicans played hardball over the debt ceiling.  The end result of the political theater from that first week of August 2011, was that the world's largest economy lost its prized AAA status with S&P.    

The 10-year Treasury yield initially spiked to a session high of 1.6227% before settling back towards 1.5961%. 

Yellen

Treasury Secretary Yellen’s retraction on her take on interest rates shows everyone knows that “interest rates will have to rise to make sure the economy does not overheat.”  Hearing such hawkish rhetoric from the former Fed Chair spooked markets.  Yellen cleared everything up after saying that she is not predicting or recommending an increase for interest rates.  This was a big oops but was quickly cleaned up and should not derail Fed Chair Powell’s aggressive dovish stance on when to start taper talk and to increase interest rates. 

Oil

Crude prices got another vote of confidence from an EIA crude oil inventory report that showed the demand recovery is accelerating.  Last night’s API data showed a weekly decline of 7.7 million barrels, so that took some of the oomph out of today’s EIA headline draw of 7.99 million barrels. US production remained below 11-million barrels and refiner utilization is now at post-pandemic highs. 

A bullish EIA crude oil inventory sent Brent crude higher but was unable to break the psychological $70 level.  The path higher for oil is there, energy markets just need to see that the situation in India does not worsen over the next couple of weeks. 

Gold

Gold prices survived Treasury Secretary Yellen’s miscommunication on interest rates and could be making another attempt at cracking the $1,800 level.  Gold prices are strengthening after Treasury yields pared an advance that stemmed from a knee-jerk reaction to the refunding announcement that contained a warning that US debt-limit tools could run out faster. 

A round of Fed speak from Evans and Bowman also provided some support for gold.  Evans noted that the risk of spiraling inflation was remote still and Bowman noted she won’t be overly concerned by the brief rise to 3% inflation.  The Fed’s ultra-accommodative stance is confirmed and a mixed global economic recovery is just what gold needs to join the super commodity cycle party. 

Bitcoin

Bitcoin and Ethereum may start to primarily trade off their fundamentals now that financial markets will enter wait-and-see mode over US hiring and inflation.  The dollar could start to trade in a range that should allow Bitcoin to trade mostly off crypto news which should be positive as corporate America continues to embrace cryptos.  The news that Fidelity National has teamed up with NYDIG and will allow banks to offer their customers the ability to buy, sell, and hold Bitcoin is a gamechanger.  Bitcoin could see continued momentum back above $60,000 just on the Fidelity news. 

Ethereum has been skyrocketing and today’s weakness is just modest profit-taking.

Dogecoin

Dogecoin, now the fourth largest cryptocurrency in the world appears to be continuing its ascent to the moon.  Shiba lovers, Reddit and Twitter users, and many celebrities jumped on the Dogecoin bandwagon this week and no-one knows how much larger this bubble will get.  Dogecoin mania will see a similar fate as GameStop did at the end of January, but will it happen if it hits the $1 level or will it be able to see continued momentum to make a run towards $2.  Social media platforms are filled with pleas to not sell at $1, but no one knows if the institutional money that is riding this fervor will be large enough to crush the retail love.  Dogecoin is the riskiest bet you can make right now.