A busy Fed Day morning

• Last round of data supports one last 25bp rate rise today
• Treasury announces buybacks in 2024
• WTI crude plunges below as demand fears grow

US stocks are slightly higher as the service sector continues to soften, bolstering expectations that the Fed will be ready to pause tightening after delivering one last rate hike.  The economy is weakening, the labor market is softening and that seems to be enough to convince a lot of traders that today’s quarter-point rate rise to 5.25% will mark the terminal rate for this cycle. 

ADP

Private payrolls just told the economy to stop it with all that doom and gloom and that the labor market is still strong.  The ADP report showed 296,000 jobs were created in April, almost double the forecast, and a noticeable improvement from the marginally revised prior reading of 142,000.  The manufacturing sector is clearly still in a recession as they lost 38,000 jobs, while leisure/hospitality firms struggle to fill all their vacancies, adding 154,000 positions. 

Pay gains slowed rapidly and that is good news for the Fed and their concerns about persistent wage pressures. 

ADP’s chief economist Richardson said, “The slowdown in pay growth gives the clearest signal of what’s going on in the labor market right now. Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.

Treasury

Treasury auction sizes are unchanged for this quarter as the debt limit restricts what they can do, but after the end of summer they may need to raise them. The Q2 Treasury refunding size is $96 billion offered, with $72.5 billion in refunding and $20.8 billion in new cash.  The Treasury will also return to buybacks in 2024, something they haven’t done in over a couple decades.  The purpose of the buyback is to help liquidity as no one wants to touch the older bills given the higher coupon you can get these days. 

The spread between the three month and 10-year Treasury yields hit a record inversion following the Treasury announcement. 

ISM Services

The ISM Services index for April showed a modest headline rebound, impressive new orders, some labor softness, and several respondent comments that suggest the economy has many mixed signals but still headed for a slowdown.  It looks like the service sector is still struggling with inflation.  

The ISM report noted that, “There has been a slight uptick in the rate of growth for the services sector, due mostly to the increase in new orders and ongoing improvements in both capacity and supply logistics. The majority of respondents are mostly positive about business conditions; however, some respondents are wary of potential headwinds associated with inflation and an economic slowdown.”

Oil

Oil prices remained heavy after the EIA crude oil inventory report confirmed sluggish demand fears.  Crude inventories fell by 1.28 million barrels per day, much less than the 3.9 million draw API reported yesterday. 

It looks like crude demand fell off a cliff here as fears of a weaker summer travel season are building, more so for China than here in the US. Wyndham CEO noted they are not seeing signs of a slowdown in bookings, somewhat mirroring what we heard earlier in the month from Delta and Booking.com.    

Crude prices don’t want to rebound even as we get some signs that supplies might struggle over the short-term.  WTI crude is below the $70 level and it doesn’t look like it is looking to stabilize anytime soon.  Oil was unable to make a meaningful move higher after reports that Russia halted some wells and will keep production data secret.  Iraq and Turkey are struggling to reach a consensus that will see the resumption of oil flows too.  

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