WILL FRIDAY’S LABOR REPORT SURPRISE ON THE UPSIDE?

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By: Kent Engelke | Capitol Securities

Equities advanced led by shares of financial companies and energy. The catalyst was the ADP Private Sector Employment Survey which greatly exceeded expectations. Data points of considerable significance include job growth for good producing industries, which include manufacturers and builders, have just had their strongest two months since 2002. Job gains for medium and small sized companies rose at the greatest pace since June.

Many times I have commented the correlation between the ADP and BLS data has declined, but the large upside surprise increases the likelihood that Friday’s estimates for the BLS statistics are perhaps low.

The ISM Non-Manufacturing Index however posted a nominally disappointing statistic, easing to the lowest level in five months. This data was largely ignored focusing instead on the bullishness of the ADP statistics.

I believe that if tomorrow’s BLS data exceeds expectations by the same amount as ADP, there will be first quarter growth estimates with a “3” handle.

Yesterday was the release of the Minutes from the March 15th FOMC meeting. In my view, much had already been disseminated given initially the general lack of market reaction.

As inferred, the last 60 minutes of trading, the Dow retraced about a 150-point gain only to close lower by 40 points. The S & P 500 declined about 0.60%. According to Bloomberg, it was the largest one day reversal in 14 months.

Some are speculating the reversal was the result of Minutes stating that equity prices are “quite high,” while others suggest it was the result of Paul Ryan commenting “tax reform could take longer than health overhaul.”

Regardless of the reason, I believe yesterday’s reversal was a direct result of the massive influence that ETFs and algorithmic trading has upon the markets where according to the SEC, 90% of the volume is the result of such activity.

What I found interesting was the Commodity Futures Trading Commission (CFTC) appointed its first Chief Market Intelligence Officer who will report directly to the CFTC’s chairman.

This new position is designed to “understand, analyze and communicate current and emerging derivatives markets dynamics, developments and trends — such as the impact of new technologies and trading methodologies upon the markets to ensure market manipulation including spoofing and unbalanced trading does not occur.”

As I noted many times, about 15 months ago, an SEC commissioner stated “because of the change in trading mechanics an unbalanced playing field may have emerged, benefiting only a few.”

Generally speaking, I am against greater regulation, but in today’s new trading era, I do believe there are abuses where activity is not justified by the underlying macroeconomic or geopolitical conditions, where security analysis and macroeconomic thesis is all but disregarded for the sake of the cheapest execution.

What will happen today? President Trump will meet his Chinese counterpart today for a two day meeting. Will there be any provocative headlines? Also released today is the Challenger Job Cuts survey. This is a third tier indicator, but at times has been of some significance.

Last night the foreign markets were down. London was down 0.33%, Paris was up 0.26% and Frankfurt was down 0.15%. China was up 0.33%, Japan was down 1.40% and Hang Sang was down 0.52%.

The Dow should open quietly higher amid the Fed’s stated but well known intent of shrinking its balance sheet amid policy makers’ concerns that stocks have gotten expensive. The 10-year is off 5/32 to yield 2.36%.

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