Jerome “Jay” Powell once again underscored the importance of the Federal Reserve and its mighty printing press. His comments to the markets were that no matter what issues may create weakness, including typical business cycle attrition, he is ready, willing and able to step up to the plate.
I’ve said this before, and will say it again, Jay Powell is proud of the role the Fed has played and considers it the main reason the nation survived the Great Recession.
Of course, many want the Fed to do more than come to the rescue, they want them to help goose growth even more. Parts of me believe Powell wants to step up and do that as well, although such moves would require years of messaging. For the most part, he would be content to make sure there are no recessions during his watch, so he’ll need those unconventional tools and more.
Wall Street wants to have its cake, and eat it too, and get rate cuts even with economic expansion.
I think the backdrop is set for Powell to pounce and markets to cheer. The expansion is long in the tooth, and while the old saying is expansions don’t die from old age, managing them becomes more difficult. On that note, I still think the street wants relatively good economic news, and that’s not what we got this morning from ADP employment report.
Big Employment Miss
The street was looking for 173,000 jobs in this morning’s employment release from ADP, but instead there were only 27,000 jobs. That’s the smallest number since March 2010. Even more depressing is the hit in goods-producing jobs, which lost 43,000:
- Construction -36,000
- Mining -4,000
- Manufacturing -3,000
The service economy held up pretty much in line with expectations with 77,000 jobs:
- Education and health +33,000
- Professional and business +22,000
- Leisure and hospitality +16,000
- Financial services +13,000
The ADP news makes Powell look prescient, and yet, fellow Fed members are suggesting it’s too early for the FOMC to consider rate cuts. Charles Evans and Richard Kaplan see strength in consumers and the overall economy. The former is a current voting member, the latter isn’t.
Impact on Markets
I’m still in the camp of good news being good news and bad news being bad news, and thus far, the market is with me.
Equity futures were pushing toward Dow +200 points but sold off after the ADP report. There a chance after digesting the news the market could turn higher, although there is more economic data to consume later this morning
Impact on Government Policy
The ADP news puts more pressure on the administration to avoid tariffs on Mexico and cut a deal with China. President Trump isn’t going to panic, especially not off a report from ADP, which was weighed down by factors, including lack of skilled workers and effects of being near full employment.
Mexico has already made big moves in their effort to assuage the administration, including a 300% increase in detained migrants from January levels. Mexico President Obrador has been very vocal about his commitment and optimism toward avoiding any tariff penalties.
China is also making nicer overtures this week as the G20 meeting in Japan draws closer.
I’d like to see semiconductor stocks continue yesterday’s rebound. The group has been hammered after a moonshot to begin 2019.
We asked subscribers to put cash to work yesterday.
Let's keep our powder dry at the start of trading.