The Day Ahead: ADP Employment Report, Productivity, ISM, Beige Book

A global rally to begin December has stocks soaring ahead of a full schedule of macroeconomic data. The risk trade is back on it's not helping interest rates.

Just over an hour before the opening bell, S&P 500 futures are 14.00 points higher at 1,193.50 and Dow futures are 123 points higher at 11,119. Overnight the Nikkei rebounded 0.51% while shares in China rose 0.12% and Hong Kong jumped 1.05%. European stocks are even higher, with London’s FTSE 100 up 1.45%, France’s CAC-40 up 1.17%, and the DJ Euro Stoxx 50 trading 1.88% higher.

Commodity prices are also on the rise. Light crude oil is 1.64% up at $85.48 per barrel, while gold prices are up 0.34% at $1,389.55.

“Comments from ECB President Trichet that suggest European officials could expand their response to the debt crisis, and Portugal’s successful auction of treasury bills, have perked up investor spirits,” said economists at BMO Capital Markets.

Reduced risk aversion has pushed interest rates higher. The 2s/10s curve is 6bps steeper at 239bps wide. The 10yr note is down almost a full point in price at a yield of 2.90% and "rate sheet influential" MBS porices are retesting the outer limits of their range (FNCL 4.0s testing 101-00).

In fresh economic data, the MBA Mortgage Applications, a weekly measure of loan application volume, decreased 16.5% in the week ending Nov. 26. Refinancings fell a sharp 21.6% in the week, marking its third straight fall, while purchases inched 1.1% forward to its highest level since early May.
 
The four week average for refinancings is down 8.2%. The four week average for purchases is up 3.8%. 

“The index of mortgage purchase applications has been languishing at low levels for a few months,” said economists at Nomura before the release. “Unfortunately, this looks to have proven a good leading signal for the recent weakness in home sales. We therefore will be watching the purchase index closely for any signs of improvement, which we think would lead a pickup in new and existing home sales.”

Key Events Today:

The Senate Banking Committee holds a hearing on problems in mortgage servicing. Panelists include FDIC Chairman Sheila Bair and Federal Reserve Governor Daniel Tarullo.

8:15 ― The ADP Employment Report, a measure of private job growth released two days before the Bureau of Labor Statistics’ jobs report, is forecast to show 72,000 new jobs in November, up from 43,000 a month before. Predictions from 32 economists range from 40k to 103k, while economists at Nomura remind us that ADP “has over-predicted the BLS count of private nonfarm payroll employment by an average of 60,000 per month” over the last six months.

“Our model suggests the report will show private payrolls rising about 70k, but it tends to overshoot in November, so we look for a 125k jump,” said Ian Shepherdson at High Frequency Economics.

8:30 ― Productivity & Costs, a Bureau of Labor Statistics measure, looks at productivity by looking at output divided by hours worked. In the third quarter, preliminary results showed productivity rising 1.9% and unit labor costs falling 0.1%. Thanks to revisions showing output in the nonfarm business sector climbing, revised results are anticipated to show productivity at +2.3%, which translates into labor costs falling 0.2%.

“GDP growth in 3Q suggests positive readings for labor productivity,” said economists at BBVA. “Output per hour increased substantially in 2009 as firms sought to become more efficient in order to protect their margins. However, as the labor market recovers, productivity growth is likely to moderate in the coming quarters.” 

10:00 ― The ISM Manufacturing Index, an influential measure of nationwide manufacturing, has been above the 50-level indicating expansion for 15 consecutive months, averaging 56.1 according to BBVA. In October the index climbed 2.5 points to 56.9; in November it is expected to decline modestly to 56.3. Regional indexes have been mixed -- the Philadelphia Fed index jumped 21.5 points to +22.5, but New York’s Empire State index weakened. 

“The summer lull is breaking up,” said economists at IHS Global Insight. “In regional evidence so far, readings from Philadelphia, Richmond, and Kansas City all showed improvement, although the (less reliable) New York Empire score collapsed, suggesting that all is not peaches and cream, but we expect the national survey to show an improving picture.  A key to watch is if strength continues in the export reading.”

10:00 ― Construction Spending, a Census Bureau measure of residential and non-residential construction in the private sector, plus state and federal spending on construction at the public level, is forecast to fall 0.4% in October after rising 0.5% a month before. The previous gain was surprising and reflected a jump in multi-family residential construction and home improvements, according to Nomura, who called the gains temporary. 

“The October construction numbers should be a mixed bag,” said economists at IHS Global Insight. “Nonresidential construction and single-family home construction are expected to be down by more than 1%. But increased infrastructure spending should offset these declines, leaving overall construction spending unchanged.”

2:00 ― The Beige Book, an anecdotal summary of economic conditions from each of the 12 Federal Reserve districts, is likely to remain dour this month. Last week’s FOMC Minutes report showed the Fed had revised its 2010-2012 outlook downward. Members cited weak indicators of household wealth, tight credit conditions and continued household deleveraging, while real estate investment, jobs, and manufacturing and trade indicators advanced more slowly than anticipated this year.

However, economists at Nomura believe the description could be considerably better this month.

“Auto sales, non-auto retail sales, manufacturing surveys and employment trends have all improved since the last survey,” they noted. “Although the there is little chance the report will indicate a rapid expansion, these signs suggests it could note an improvement relative to the early sluggish pace. Also notable in the report will be the discussion of commodity price developments. We suspect that respondents will note higher input costs, but indicate that they have not passed those costs on to final consumers.”

2:10 ― Janet Yellen, vice chairman of the San Francisco Fed, speaks to the Committee for Economic Development on “Fiscal Responsibility and Global Rebalancing” in New York

Other Events...

• Deadline for Fed to provide details of crisis lending per Dodd-Frank
• 10:15 Fed expected to purchase between $7-9 billion Treasuries in QEII open market program. Desk targeting TSYs maturing between 06/30/2016 and 11/30/2017