(ADP) Jan 05: Better Than Expected – Initial Claims – Economic Highlights

Positive domestic data and the resumption of Europe-centered negative headlines will be pushing stocks in opposite directions today. France held an overall successful bond auction today, though yields inched up a bit. But Euro-zone worries are getting focused on the region’s banks who need to tap the capital markets to spruce up their battered capital positions. The Spanish government announced that the country’s banks need to raise €50 billion in fresh capital, while Italy’s UniCredit was forced to offer steep discounts in its bid to raise to €7.5 billion in equity capital. Wednesday’s modestly positive stock market finish despite no shortage of Euro-zone issues holds the promise that the market may be able to eke out further gains today as well on the strength of reassuring domestic news flow.

The focus on the domestic front shifts to the labor market today, where we saw two better than expected readings this morning in the weekly Initial Jobless Claims and the December National Employment Report from payroll processor, Automatic Data Processing (ADP). The ADP report came in significantly better than expected, with 325K jobs created in December, almost double the expected 175K level. The prior month’s tally was modestly revised downwards to 204K from the originally reported 206K level. The ADP report is supposed to serve as a preview of the official monthly jobs numbers from the Bureau of Labor Statistics (BLS) that comes out this Friday.

Today’s ADP report is way ahead of market expectations for private-sector jobs in Friday’s BLS report. If the ADP report is any indication of things to come on the labor market front, then we will likely get a blockbuster number on Friday. We have to keep in mind, though, that ADP’s track record in foretelling the BLS numbers on a month-to-month basis is less than perfect. We will have to wait till Friday to know the forecast accuracy of today’s report. Overall though, this report is expected to cause expectations for Friday’s BLS report to go up.
The Jobless Claims data also came in better than expected, with initial claims dropping by 15K in the last week of 2011 to 372K. The prior-week’s tally was increased by 6K to 387K from 381K. The four-week average dropped by 3.2K to 373.2K. The continued drop in Jobless Claims in recent weeks and today’s strong ADP provide unmistakable evidence of an improving U.S. labor market. Naysayers will likely question the unusual strength in this morning’s ADP reading, citing similar strength in this series in December in the last two years. In fact, the December ADP readings were the strongest monthly gains in 2009, 2010, and now in 2011.

That said, the ADP strength is not some isolated and outlier data that is uncorroborated by other reports. The downtrend in the weekly claims data aside, we saw similar strength in the employ component of the December manufacturing ISM survey. And today’s non-manufacturing ISM report, coming out a little later, is expected to show a similar positive trend. The bottom line is that the strong ADP reading may be due to seasonal corporate book keeping. But it nevertheless reflects the same developments that we are seeing in other economic reports as well.

In corporate news, we have a negative earnings pre-announcement from Tesoro (TSO), with the independent refiner citing a weak margin environment in California. The Children’s Place (PLCE) also lowered its outlook for the fourth quarter, with aggressive markdowns and high apparel costs weighing on earnings. Seagate Technology (STX) guided higher, while Eastman Kodak (EK) appears to be readying itself for a bankruptcy filing.

Today’s economic releases include the ISM Services Index which is scheduled at 10:00 AM EST and is expected to increase to 53.2 and Crude Inventories which is scheduled for release at 10:30 AM EST.

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