Will A Strong ADP Report Stabilize The Dollar?

 

 

The key issue today is whether the ADP estimate of US private sector employment growth in April will be sufficient to fuel a dollar recovery.  Yesterday’s trade balance blowout prompted downward revisions to Q1 GDP into negative territory. And although the services ISM was better than expected, including an uptick in employment, many investors and the media focused on the Q1 implications. 

The consensus is for the ADP estimate to be around 200k, a small improvement from the March report of 189k. It had over-estimated the initial BLS report by 60k.The March ADP report was the weakest since January 2014, and a 200k rise now would be the second weakest report since then. We suspect that an ADP report in line with the 6- and 12-month averages (235-238K) would help put a floor under the dollar. 

However, the divergence theme that is the mainstay of the dollar bulls, has been eclipsed by other developments. Chief among these is the fading of the deflation threat, especially in Europe, helped by the continued recovery in oil prices and many other industrial commodities. This in turn has helped spark a major unwind of macro trades, which were long European bonds and stocks and short the euro.  

Evidence that the eurozone recovery in Q1 is continuing into Q2 can be found in the PMI data. The service PMI rose to 54.1 from 53.7 flash reading and practically no change from the 54.2 in March. The March reading matched the July reading from last year, which is the high for this short time series. This followed a small tick up in the manufacturing PMI reported last week from the flash reading as well. The composite was essentially unchanged at 53.9 from 54.0 in March.  

Turning briefly to the country breakdown. Germany’s report was shaved from the flash while France was revised higher. More interesting is the improvement in Spain and Italy. Spain service PMI rose to 60.3 from 57.3, which is an eight year high. Output is the best since November 2006.  New orders are the highest since June 2000. Employment also stood at multi-year highs. Italy’s reading rose to 53.1 from 51.6. This is the highest since last June and follows the stronger than expected manufacturing survey out last week.