The macro news is better than it appears

WED, AUG 05, 2020

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF WED, AUG 05, 2020 • 11:34 ET

DJIA		27184.05
		+1.33%	+355.58

S&P 500		3328.55
		+0.67%	+22.04

NASDAQ		10976.38
		+0.32%	+35.22

EDITOR'S NOTE

This week we've started to get the first reports on what happened to the economy in July. There's a lot more at stake than in May or June, when the reopenings caused a sharp rebound in activity. In July, Covid was spreading fiercely in the highly-populated south and west, and the main question since then has been how much the recovery stalled out.

The first piece of July data was actually much better than expected. The ISM manufacturing survey out Monday rose a point-and-a-half to a better-than-expected reading of 54.2, up from its nadir of 41.5 in April. That means more manufacturers reported their business was growing last month, in spite of the pandemic. The new orders gauge, which is forward-looking and especially market-sensitive, surged to 61.5--a two-year high. Hence analyst Michael Darda's reaction that "it does not appear that a broad-based reversal of the recovery is underway."

Fast-forward to today, and the ADP jobs report that came out this morning. It was much weaker than expected. It said the U.S. added back only 167,000 jobs last month versus the expectation of nearly 2.4 million! As BMO's Ian Lyngen observed, "[this] is by far the largest disappointment in ADP history."

But wait. Even though the market's immediate reaction was a selloff in stocks and bond yields sinking yet again, there's more to the story. For one, ADP revised up its initial June jobs estimate by 1.9 million jobs. Wowza. This is the second straight month they've done a humongous upward revision; last month, they revised their initial report that the U.S. lost 2.7 million jobs in May to actually show a gain of over 3 million.

So it's not clear the ADP report is able to give us precise real-time information about how much hiring actually stalled out last month. But to the extent that it is reliable, ADP's tally of how many total jobs have returned since March would still suggest Friday's "official" report from the Labor Department would need to show a gain of one million jobs to match their result, as Peter Boockvar notes, versus the consensus of 1.5 million. In other words, not a disaster.

On top of that, the ISM services gauge also came out this morning. You'd think this one, with its inclusion of restaurants, hotels, and the like, would be more sensitive to the spread of Covid dampening the recovery. But the July report also just surprised to the upside, rising one point to 58 versus the expected drop to 55. And get this--the new orders gauge surged hit an all-time high, popping to over 67 last month.

So is the stock market's continued rally really at odds with the economy? Not according to these macro data points. "The outlook for both capital spending and earnings is brightening," Mr. Darda of MKM Partners wrote earlier this week. "Maybe the stock market isn't so 'dumb' after all."

Plus, "markets look forward while most macro data is inherently backward-looking," Mr. Darda reminds. In that sense, the continued rally is a hopeful sign for everyone.

See you at 1 p.m!

Kelly

Kelly Evans
Twitter: @KellyCNBC

Instagram: @realkellyevans

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