Will data force Fed to discuss more cuts?

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Wednesday brought more bad news for the economy, with downside surprises in the ADP employment number and the Institute for Supply Management’s non-manufacturing index. If Friday’s employment report also missed forecasts, another rate cut may be discussed when the Federal Reserve meets this month.

ADP said private-sector employment rose by 67,000 jobs in November, less than half of the 140,000 gain expected by economists, while the ISM index slid to 53.9 from 54.7, shy of the 54.5 level predicted by economists polled by IFR Markets.

“Just as many economists are ever so slightly raising their forecasts for GDP in 2020, we get this terrible ADP jobs number of only 67,000 jobs for November,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors. “So we have to ask how bad Friday’s jobs number will look.”

While the ADP numbers don’t account for the end of the GM strike, Friday’s employment data will get “a boost,” but “the consensus estimate is for 185,000 jobs which now look optimistic,” he said.

“And what does it mean for the Fed meeting next week if the jobs number is terrible?,” Doty asked. “The Fed is clearly struggling with getting themselves out of the repo business and despite another round of aggressive QE is having to supply more and more money to the [repurchase agreement] and cash markets. So between failing to do enough to bring traditional repo investors back in to the repo market and a possible poor jobs report to shake their reliance on a strong consumer to offset the pervasive weakness in manufacturing, maybe a rate cut will be ‘back on the table’ when they meet December 11th.”

And while ADP is “not great predictor of official data,” Grant Thornton Chief Economist Diane Swonk tweeted, “Both surveys slowed over last year, mostly because of weak trade and manufacturing activity.”

Nick Reece, senior analyst & portfolio manager at Merk Investments, noted the ADP “report had a couple of concerning data points in addition to the headline number being weaker than expected.” First, small firms added only 11,000 jobs. “The year-over-year growth rate in jobs gains from small firms is pretty weak and small firms are the country’s biggest employer (in aggregate a much bigger employer than large firms)."

Additionally, “the goods producing sector showed net losses: 18,000, compared to services sector, (which added) 85,000,” Reece said. “The goods producing sector has been under pressure and this data point won’t help hopes for an immediate rebound, particularly after Monday’s weak ISM manufacturing PMI reading.”

The ISM business activity/production index declined to 51.6 in November from 57.0 a month earlier, while the new orders and employment indexes rose in the month.

The 53.9 in the headline number was its third-lowest read this year.

“The index appears to be stabilizing modestly below 55.0, indicating that the sector that accounts for the bulk of U.S. economic activity continues to expand, but at a markedly slower pace than it did in 2018 when the index averaged 58.9, consistent with the deceleration in real GDP growth to 2%,” Berenberg Capital Markets U.S. Economist Roiana Reid wrote in a note. “The published comments from respondents about near-term activity were mostly positive and a couple of respondents highlighted the continued negative impact of tariffs.”

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Monetary policy Economic indicators