ADP NFP + ISM Non-Manufacturing Preview: Data are indicative not only for the NFP

Thursday, September 6th, is the deadline for public comments on new trade tariffs that the US wants to impose on China. These new duties are of a much larger scale than those slapped so far: $200 billion against $50 billion so far. China has retaliated in kind for every dollar, and it will be unable to do so this time as it does not import that magnitude of goods from the US. China may disrupt other US economic activities in China.

The escalation in trade wars is set to happen on the same day as these data points are released. On the one hand, the news can overshadow the data. On the other hand, the data are critical for understanding the impact of trade on hiring and on business sentiment in the US.

ADP NFP - Lower expectations

The private sector jobs report by Automated Data Processing (ADP) is published on Thursday, September 6th, at 12:15. The report is released one day later than usual due to the Labor Day holiday on Monday. The figures are not always fully-correlated with the official BLS Non-Farm Payrolls report published on Friday. Nevertheless, they provide some guidance and also move markets.

ADP reported a robust rise of 219,000 private sector positions in July, above expectations and above the average. That did not stop the official NFP from disappointing with an increase of only 157,000 positions in total. Expectations for August are lower, also due to this gap between both reports. An increase of 187,000 jobs is on the cards. Such a gain would still be considered healthy.

If the number meets expectations or beats them by a bit, markets will see it as "more of the same" and will not alter the NFP expectations. An increase of over 230,000 positions would already lift the projections for he official NFP. 

A disappointing increase in jobs, such as a figure below 170,000 would lead to fears that the solid and steady jobs growth that the US experienced for years is over. It would imply a second consecutive month of slow employment growth. 

Expectations for a weaker official NFP would also raise questions about the impact of trade wars on the broader economy. While evidence may be scant and it is too early, some analysts may connect the dots between a meager advance in jobs and the trade wars. On the one hand, it could trigger a risk-off sentiment favoring the US Dollar. On the other hand, some may rethink the path of rate hikes by the Fed, thus weakening the greenback. 

The more likely scenario is a sense of unease towards the official NFP but not immediate market impact because the official report will be awaited. 

ISM Non-Manufacturing PMI - Gauging the sentiment

The ISM services purchasing managers' index, released on Thursday at 14:00 GMT, is also a hint for the Non-Farm Payrolls. The services sector outweighs the manufacturing one, and an improved sentiment means more hiring and more economic activity. The employment component provides a closer read on the jobs market, but the headline figure tends to determine the immediate reaction. 

Back in July, the PMI missed with a score of only 55.7 points, a downfall from the highs near 60 points seen earlier in the year. The figure still points to growth, but only one that can be described as OK, not robust or steadfast. The 50-point threshold separates expansion from contraction. Concerns about higher costs due to the tariffs and uncertainty about future policy tilted sentiment downwards.

The score for August is expected to be similar: 56 points. A surprise jump towards 60 would be welcome news, pointing to robust rises in the sector. A disappointment and the number getting closer to 50 would be of concern.

Impact

To see a more significant effect, both figures need to come out above expectations: either beat or miss. In many cases, such releases, only 105 minutes apart, can be contradicting, triggering choppy trading but no long-lasting impact.

A solid read on ADP and an OK ISM Non-Manufacturing PMI that beats expectations could support the greenback. A greater drop than projected in private sector jobs growth and another deterioration in business sentiment could exacerbate the situation. 

Conclusion

Both indicators are critical for updating forecasts for the official NFP on Friday and also for gauging business sentiment related to the trade wars. Both reports come at a sensitive time when trade tensions are escalating. This does not mean they are overshadowed by the news, but would instead help form the narrative.

More: Trade wars: $200 billion is serious, 3 scenarios and currency reactions for the upcoming escalation