ADP Hiring Figures Point to Added Upside in Treasurys
Bond yields are headed even lower…
Over the last month, Wall Street has increasingly questioned the domestic growth outlook. Economic numbers like consumer confidence, personal spending, and retail sales have all pointed to a slowdown. The rising pessimism has caused investors to reduce exposure to risk assets like stocks.
Data released yesterday confirmed some of those fears. Payroll processor ADP released its monthly employment report for February, The data showed businesses added 77,000 employees compared to the expectation for a gain of 141,000 and January’s upwardly revised increase of 186,000. In fact, it was one of the weakest monthly numbers in the last two years…
Not only that but the difference in pay increase for job changers compared to job stayers slowed. The gap closed to just 2%, implying openings are declining and better opportunities are becoming harder for employees to find. That means individuals will have less money to spend, weighing on economic growth.
Yet, there’s an upside. You see, between 2022 and 2023, our central bank raised interest rates at one of the fastest clips we’ve experienced for just this reason. It wanted to reload its toolbox so it could fight the next downturn. And if the current trend in hiring continues, the Federal Reserve may have to lower interest rates by more than the two cuts it's currently endorsing. The change will lead to a drop in bond yields, supporting a rally in U.S. Treasury prices.
But don’t take my word for it, let’s take a look at what the data’s telling us…
To get an idea of what the ADP numbers look like from a broader standpoint, I looked at the numbers from 2017 through this past February. (Please note, I left out 2020 due to the big swings.) I then tallied the data on a month-by-month basis to get an idea of the typical outcome. That way I could compare the results so far this year to the average. Take a look…
As you can?see, the results are well below average. In January, the ADP data came up 83,300 jobs short of the typical number while the February gain was light to the tune of 148,300 employees. When we add that up, it means companies have added 231,600 less employees than they usually do at this point of the year.
This is important from a monetary policy standpoint. Fed officials have repeatedly said they’re willing to stand pat on policy for now. But, if they see signs that employment is starting to fade, policymakers have said they’re willing to cut rates to support growth and stave off a broader slowdown.
The early ADP numbers point to slowing growth… And based on the real federal funds rate (borrowing costs minus inflation), our central bank has plenty of room to ease policy…
The above chart shows us the real rate of interest based on the personal consumption expenditures (“PCE”) gauge produced by the U.S. Bureau of Economic Analysis (“BEA”). I chose this index because it’s the Fed’s preferred way to observe inflation growth. In other words, any policy decisions will be based on this number.
A positive reading means interest rates are slowing price growth, giving the Fed room to cut. Conversely, when a negative reading means borrowing costs are so low, they’re stimulating growth and pushing prices higher.
As you can see, back in early 2022, when our central bank started raising rates, the real rate of interest was -6.5%. That caused policymakers to boost rates aggressively. And in July of last year, real rates reached 2.8%, meaning there was plenty of cushion to lower without igniting inflation once more. Hence the 100-basis points worth of rate cuts late last year.
Now, we must remember, the Fed’s goal is to manage borrowing costs back to the so-called “neutral” level. That’s one where interest rates are neither helping nor hurting inflation growth. Instead, they’ve found the fine line of stable prices and maximum employment. In policymakers’ eyes, that’s roughly 2% inflation and a 4.5% to 5% unemployment rate. With PCE at 2.5% and unemployment at 4%, we’re close but not all the way there.
When the January PCE numbers were reported, the measure experienced its first drop since the September 2024 release. However, since the federal funds target hasn’t changed since December, the PCE result caused the real rate of interest to rise from 1.8% to 1.9%. In other words, by deciding to sit still in January, the Fed caused borrowing costs to become slightly more restrictive, providing added room for rate cuts.
But it doesn’t stop there… in the chart, I’ve mapped out the real rate of interest from the start of 2000. Based on the data, the average real rate has been -0.3%. However, that number is skewed lower by the massive drop from mid-2020 to early 2023. So, I calculated the typical real rate from the start of 2000 to the end of 2019. That number is -0.1%, or just below the central bank’s neutral target. In other words, the Fed has 200 basis points worth of rate cut room to support an economic slowdown.
Like the data we just looked at indicated, the early trend in the ADP numbers shows employment growth is slowing. And as I highlighted on Monday, recent Fed manufacturing and services sector surveys indicated the same. If we see similar results when the government releases its hiring figures on Friday, it’s sure to get on the Fed’s radar. ?
A change in thinking about easing policy won’t happen overnight. But a slowdown in hiring is a warning sign. And if the central bank waits too long to respond, the situation could grow worse, dragging the economy with it. That should lead to an improved rate cut outlook later this year, weighing on borrowing costs and supporting a rally in U.S. Treasury prices.
Five Stories Moving the Market:
The Federal Reserve said U.S. economic activity has risen slightly but unevenly since mid-January, employment nudged higher, and prices increased modestly, with businesses and households expressing continued optimism – Federal Reserve. (Why you should care - the Beige Book report was slightly worse relative to the commentary released in January)
U.S. President Donald Trump is considering exempting certain agricultural products from tariffs imposed on Canada and Mexico, the latest move by the administration to offer relief to certain sectors from the sweeping new import taxes; Agriculture Secretary Brooke Rollins said “everything is on the table” and she is “hopeful” that the administration could decide on providing relief for the agricultural sector – Bloomberg. (Why you should care – such a reprieve would help to spare goods that consumers buy every day)
Automakers will get a one-month reprieve from tariffs on Mexico and Canada for cars that comply with a free-trade agreement between those two nations and the U.S., the White House said – WSJ. (Why you should care – Press Secretary Karoline Leavitt suggested the administration wants to see more manufacturing done in the U.S.)
U.S. services sector growth unexpectedly picked up in February and prices for inputs increased, which combined with a recent surge in the cost of raw materials at factories suggested that inflation could heat up in the months ahead – Reuters. (Why you should care – the ISM services sector report was less “stagflationary” than the manufacturing survey released on Monday)
Bank of England Governor Andrew Bailey said a significant shift is under way in U.S. economic policy that poses a threat to global economic growth; other BOE rate setters appearing at a quarterly hearing in the legislature echoed Bailey’s concerns about the threat to growth from higher tariffs – WSJ. (Why you should care - Bailey said countries running huge trade surpluses, like China and Germany, need to address why there’s such an imbalance)
Economic Calendar:
Earnings - KR
Eurozone – EU Leaders Summit (5 a.m.)
Eurozone – Retail Sales for January (5 a.m.)
U.S. – Challenger Job Cuts for February (7:30 a.m.)
European Central Bank Monetary Policy Announcement (8:15 a.m.)
U.S. - Initial Jobless Claims (8:30 a.m.)
U.S. - Continuing Claims (8:30 a.m.)
U.S. – Unit Labor Costs for 4Q (8:30 a.m.)
ECB’s Lagarde (President) Speaks (8:45 a.m.)
BOE’s Mann (Board Member) Speaks (3:15 p.m.)
Fed’s Waller (Board Member) Speaks (3:30 p.m.)
Fed's Balance Sheet Update?(4:30 p.m.)
Fed’s Bostic Speaks (7 p.m.)