Markets Turn Focus on ADP Payrolls Amid US Government Shutdown

The US government shutdown continues, and will become the longest in history if a deal isn’t struck before Wednesday. That means several key data releases won’t happen as scheduled, including the NFP that was due on Friday. With the Fed pivoting to worry about the state of the job market, traders are starved for information. That means Wednesday’s ADP payroll figure could become much more critical.

Traders have largely dismissed the ADP as a predictor of the NFP. Which is released two days later. There is often significant variation between the two numbers, and generally, markets focus on the official NFP data published by the Bureau of Labor Statistics. After all, that’s the measure that the Fed tracks. But, without NFP to rely on, traders are taking a second look at the ADP. Particularly since the Fed is also considering it as part of their assessment of the economy.

Why Do ADP and NFP Not Match

The primary reason for the discrepancy in readings between the ADP non-farm payrolls and the BLS non-farm payrolls is the differing methodologies. Automatic Data Processing (ADP) is a company that provides human resource management software services and compiles its payroll data using information from its own systems. This means it has access to and compiles its data based on actual hiring and firing practices in American companies.

The BLS, on the other hand, relies on surveys it sends to 122,000 companies across the US, and then compiles its report based on the responses. However, lately, it has been receiving fewer and fewer responses to its surveys, with a latest survey response rate of just 42%. This has caused increased uncertainty in the data.And ever larger revisions as the BLS tries to fill the gaps in its information.

Comparing the Data

The other difference is that ADP compiles the number of people who are actively on payroll.Whether they are working or not. For example, it includes employed people who are on strike, furloughed, or otherwise affected. The BLS counts people who have received a paycheque in the last month. Therefore, in cases such as a large, prolonged strike, the data may yield different results.

According to a study conducted by the Fed, there is a 94% correlation between the data. That’s because NFP figures usually end up matching the ADP figures after they have been revised a couple of months later. While that doesn’t help traders trying to anticipate the market’s reaction to the NFP. It does provide important insight into the state of the economy and the labour market.

What to Look Out For

The consensus among economists is that APD will rise to 24K from -32K a month earlier. However, it’s worth noting that readings for the last two months have turned out to be negative. Despite economists’ initial predictions of positive readings.

The main impact of the data is on expectations for the Fed. The FOMC at its last meeting stated that it was focused on weakness in the labor market. So the worse the ADP figure is, the more likely it is that the market expects easing. Futures are pricing in a 70% of a rate cut in December. If ADP comes in above expectations, those odds could decrease and support the dollar. If there is a miss in ADP, it could weaken the dollar as a Fed rate could could be seen as more likely.