Stocks fell again today in response to poor jobs data just one session after the Job Openings and Labor Turnover Survey (JOLTS) showed a shockingly low number of available positions in February. The Dow gained slightly while the S&P and Nasdaq Composite both slumped.
This morning, it was the ADP employment report that delivered the bad news: only 145,000 payrolls were added last month, missing the 210,000 job estimate badly. It’s also a major step down from February’s gain of 260,000 jobs as measured by ADP.
“Our March payroll data is one of several signals that the economy is slowing. Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down,” explained ADP chief economist Nela Richardson.
Pay growth decelerated, too, but not nearly as much as the Fed would have hoped with such a weak payroll number. Job-stayers saw pay rise 6.9% year-over-year (YoY), down from 7.2% in February. Pay growth was up 14.2% YoY for job-changers in March, down from 14.4% in February.
This continued the slow slide lower in ADP’s wage growth, which peaked last summer.
As a result of today’s report, the market now believes there’s about a 60% chance that the Fed pauses its hikes in May according to the CME Group’s FedWatch tool. That’s up significantly over the last few sessions.
The ISM services activity index likely dented sentiment today as well after falling to 51.2, which was well below the consensus estimate of 54.4. New orders tumbled while services prices sunk to their lowest level since July 2020.
“There has been a pullback in the rate of growth for the services sector, attributed mainly to (1) a cooling off in the new orders growth rate, (2) an employment environment that varies by industry, and (3) continued improvements in capacity and logistics, a positive impact on supplier performance,” said ISM chair Anthony Nieves.
“The majority of respondents report a positive outlook on business conditions,” he concluded.
That being said, there were still many pessimistic respondents who anticipated a slowdown in the second half of this year. This perhaps was summarized best by one respondent from the healthcare industry who said:
“Although patient volumes and revenues continue to be strong, labor and inflationary pressures have led to higher operating expenses, exceeding revenues and resulting in negative operating margins.”
Negative margins are obviously not good, and if this trend is reflected in the services sector this earnings season, services stocks could take a serious hit. Earnings are right around the corner for banks, and the rest of the market will report quarterly results soon after.
With the S&P still elevated well above its recent lows despite the retracement of the last two days, a case could be made for a sudden reversal lower. The likely catalyst would be a bad jobs report this Friday. What could drag stocks lower still would be a weak earnings season that extends beyond just the services sector and into other market-leading names as investors come to terms with the fact that a recession is likely here to stay.
