The ADP National Employment estimate for May came out at 152,000 new jobs hired, which was lower than the market’s prediction of 175,000 and a decline from the prior month’s downwardly revised 188,000 estimate.  The markets always take the ADP report with a grain of salt, as it is only an estimate that is extrapolated from the actual hirings of ADP clients, so it is not always an accurate estimate of the actual job hiring levels in any month. 

This was good news for the bond markets as it is another indication of a cooling labor market, which helps increase the probability of the Fed doing a rate cut in September. The markets are waiting for Friday’s Non-Farm Payrolls report for May which is the official measure of new jobs hired in a month and is predicted to show 185,000 actual hirings in May. If this report were to come out surprisingly lower, the markets would have greater confidence in this data, and this would create an upwards pressure on MBS prices and a downward pressure on mortgage interest rates on Friday. The other key news today was the Institute for Supply Managements survey of purchasing managers in the service industries, which showed a surprise increase in activity, with the index coming out at 53.8 for May which was higher than the market’s estimate of 50.8 and a reversal of direction from the prior month’s 49.4 index. Any index value above 50.0 represents expansion of activities, and below 50.0 represents contraction of activities. The relevance of this report is that the Fed has been worried that the strong growth in the services industries is contributing to the tight labor market and is a source of increased inflation pressures. The silver lining in today’s ISM report is that the portions of the index related to hiring showed a contraction at a 47.1 index, despite the increase in business activities.

When will the Fed do their first rate cut?   This is the top question in the stock and bond markets. The next Fed meeting will be next week on June 11-12 and the markets are not expecting any rate cut to be announced at the end of this meeting.

The markets will be very focused on any changes in the Fed’s view of the economy when they issue their press release at 2:00 pm ET on Wednesday, followed by a live press conference by Fed Chair Jerome Powell. The markets will literally compare the Fed press release word-for-word with the prior meeting’s press release to identify a change of even one word to indicate if the Fed is becoming more confident that inflation is being brought under control. 

The Fed will likely state that they have seen some encouraging signs of a cooling labor market and reduced inflationary pressures in the economy, but they need to see more months of reports to confirm this trend is continuing before they consider beginning rate cuts. Once the first Fed rate cut occurs, this will create a slight stimulus to the economy within about six months of the cut, and Fed does not want to reignite inflation by doing the rate cuts too soon. The Fed Futures market is currently predicting about an 80% probability of the first rate cut happening in September, a 100% probability of it being done by November, and just under a 100% chance of two cuts happening by December. If the Fed makes any material changes in their outlook in their public statements next Wednesday, this would immediately impact the Fed Futures market and these implied probabilities. If the Futures market probabilities increase this will drive an immediate rally in the MBS markets which would create an immediate downward pressure on mortgage interest rates. The opposite will happen if any of the Fed’s comments on Wednesday cause the Fed Futures market implied probabilities to decline.

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