ADP raises expectations ahead of NFP release

Goof morning,

• ADP raises expectations ahead of NFP release;

• Strong jobs report may be bad for equities and Treasuries but good for the dollar;

• ECB unlikely to announce more stimulus measures but Draghi may talk down the euro more;

• Plenty of US economic data also being released today.

A mixed start to the session from an economic data stand point has not taken the shine off risk appetite on Thursday. In Europe, indices are trading as much as six tenths of a percentage point higher, while in the US indices are expected to open around a tenth of a percentage point higher. Ahead of the opening bell, the S&P is expected to open 1 point higher, the Dow 21 points higher and the Nasdaq 4 points higher.

A lot of this may be attributed to yesterday’s ADP figure, which smashed expectations with a 281,000 increase in June. Of course, this is only viewed as an estimate of the official job creation figure, and a pretty poor one at that, but a beat of that magnitude will always raise expectations ahead of the non-farm payrolls release.

As a result, today’s strong start is not necessarily an ongoing reaction to the ADP figure but higher expectations ahead of the jobs report. With that in mind, a reading in line with analysts’ forecasts of around 212,000 is no longer likely to be good enough for traders. We need to see something around 250,000 or more in order to fall in line with what is now being priced in.

The next question is how the markets will react to the data. Of course, a strong jobs report is good for the economy but that is not necessarily good for risk appetite. When the rally in equity markets is being supported by lower interest rates, the threat of an earlier rate hike as a result of an economy that’s recovering at a faster rate is not going to be conducive with a continuation of that rally. With that in mind, a figure in line with yesterday’s ADP number is likely to weigh on equity markets today, while US Treasury yields could rise and the US Dollar strengthen.

Other aspects of the jobs report are also likely to be of interest, such as the unemployment rate, the participation rate and the average hours worked, due to the Fed’s commitment to base monetary policy decisions on a basket of indicators. However, based on what we’ve seen in the past, the non-farm payrolls figure, along with revisions to previous releases, still carries the most weight.

Another major event today is the ECB rate decision and press conference. This is not because we’re expecting any further stimulus from the ECB because we’re not. ECB President Mario Draghi has a tendency to create major swings in the market and always delivers plenty of volatility.

We may see a more dovish Draghi at the press conference today as I imagine the ECB will not be pleased with the strength still being seen in the euro despite all of the stimulus measures announced last month. It’s no secret that a strong euro is not ideal for the eurozone and Draghi has used to tactic of talking down the currency in the past. With it still trading above 1.36 against the dollar, we may see this tactic used again in an attempt to force it through 1.35.

Aside from these two events , there’s also plenty of big economic releases coming from the US today including weekly jobless claims, services PMI, non-manufacturing PMI and trade balance. Each of these has the potential to move the markets and as a result I expect to see a huge boost in volatility today.