U.S. ADP jobs report expected to be mildly below-trend
U.S. Q2 GDP expected to be revised slightly higher to +2.7%
When is the Treasury’s X-date?
Weekly EIA report
U.S. ADP jobs report expected to be mildly below-trend — The market consensus is for today’s Aug ADP report to show an increase of +185,000, which would be mildly below the 12-month trend average of +204,000. ADP jobs fell to +178,000 in July but that followed relatively strong months of +191,000 in June and +234,000 in May.
On the labor front, the market is mainly looking ahead to Friday’s Aug unemployment report. The consensus is for Aug payrolls to show an increase of +180,000, which by no coincidence would exactly match the 12-month trend average. Payroll growth recently showed some weakness in March (+50,000) and May (+145,000), but otherwise payrolls have shown increases of more than +200,000 in every other month this year.
The prospects look favorable for continued strong hiring based on the job openings data. The JOLTS U.S. job openings series in June soared by +461,000 jobs to a record high of 6.163 million jobs. That was a strong leading indicator for job growth over the next couple of months since many job openings will turn into an actual job hire once the 1-3 month hiring process is completed.
The consensus is for Friday’s Aug U.S. unemployment rate to be unchanged at 4.3%, which would match the 16-1/4 year low of 4.3% first posted in May. The U.S. unemployment rate is already at the 4.3% level that the FOMC has been forecasting for Q4-2017 and is only +0.1 point above the 4.2% level that the FOMC is forecasting for 2018-19.
The current unemployment rate of 4.3% is -0.3 points below the FOMC’s estimate of a longer-run natural unemployment rate of 4.6%, which suggests that the U.S. labor market is tight with at least some theoretical upward pressure on wages. The consensus is for Friday’s Aug average hourly earnings report to edge higher to +2.6% y/y from July’s +2.5%, but remain below the 8-1/4 year high of +2.9% posted in Dec 2016.
U.S. Q2 GDP expected to be revised slightly higher to +2.7% — The market consensus is for today’s Q2 GDP to be revised slightly higher by +0.1 point to +2.7% from +2.6% (q/q annualized). The upward revision is expected to stem in part from an anticipated upward revision in Q2 personal consumption to +3.0% from +2.8%. Consumers were by far the largest contributors to Q2 GDP growth.
Looking ahead, the consensus is for U.S. GDP growth to remain relatively strong at +2.6% in Q3 and +2.4% in Q4 on catch-up from lackluster first half growth of +1.9%, but GDP growth is then expected ease to +2.3% in 2018.
When is the Treasury’s X-date? — Treasury Secretary Mnuchin has told Congress that his deadline for a debt ceiling increase is Friday, September 29. Mr. Mnuchin likely picked that date since it is the last business day before Monday, Oct 2, which could easily turn out to be the Treasury’s X-day, i.e., the day when the Treasury runs out of borrowing authority and does not have enough cash on hand to meet all its obligations.
The Treasury on Oct 2 must make several large payments including $81 billion for the Military Retirement Trust Fund, $24.1 billion for Social Security payments, $7.4 billion for interest payments, and $5.4 billion for the Civil Service Retirement Fund. However, the Treasury might be able to squeak by Oct 2 depending on the level of incoming tax revenues during September. That uncertainty is why the Bipartisan Policy Center (BPC) is currently pegging the Treasury’s X-date in early to mid-October (see graph).
It remains to be seen whether Congress will raise the debt ceiling by Mr. Mnuchin’s suggested deadline of Friday, Sep 29, or whether Congress will tempt fate by waiting until the last possible minute in October to raise the debt ceiling. The Treasury appears to be technically capable of prioritizing interest payments on government debt to avoid a sovereign debt default, according to a letter that the Treasury sent to the House Financial Services Committee in 2014. That would avoid the potentially catastrophic outcome of a U.S. sovereign debt default, which could spark a new systemic financial crisis.
However, the result would still be chaos since the Treasury after its X-date would be able to pay only about three-quarters of its bills and would have to defer payments on about one-quarter of its obligations, according to the Bipartisan Policy Center. Fitch has already said that it would likely downgrade America’s credit rating if the Treasury blows past its X-date and cannot meet all its financial obligations.
The markets remain fairly certain that Congress will raise the debt ceiling before the Treasury’s x-date, thus avoiding even the threat of a sovereign debt default. The 5-year U.S. credit default swap has been steady at 25.95 bp over the past 2 weeks, above the 22 bp level seen in June but below the peak of 30 bp seen after President Trump was elected and far below the peak of 64 bp seen during the 2011 debt ceiling crisis. However, investors have been shunning T-bills that mature in early October, resulting in higher T-bills yields. The rise in early-October T-bill yields reflects odds of about 15% for a Treasury default on those T-bills.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -2.0 million bbl drop in U.S. crude oil inventories, a -1.5 million bbl drop in gasoline inventories, a -400,000 bbl decline in distillate inventories, and a -0.8 point drop in the refinery utilization rate to 94.6%. However, today’s report is for the week ended Aug 25 and will therefore show some distortion from Hurricane Harvey, which made landfall on the last day of the reporting week of Friday, Aug 25. The weekly EIA report will be of little use over the near-term due to Harvey.