Stocks fall as Wall Street goes Defensive

• ADP mattered this week
• Wages advance at slowest pace in over a year
• Services Sector Cools

Wall Street is realizing that you need a strong economy to keep stocks heading higher. Treasury yields headed lower after both the ADP private payrolls report and ISM Services Index both suggested the economy is weakening. Traders are turning defensive as utilities, healthcare, energy and consumer staple stocks are rallying.

The reason we aren’t selling off harder is that many traders believe that even if the Fed doesn’t cut rates as soon as the market is pricing that in, they will cut more aggressively next year.

ADP

Wall Street normally shrugs off the ADP report, but that did not happen today.  Private employers in the US posted a slower pace of hiring in March as the economy is slowing. The ADP National Employment Report showed that private payrolls increased 145,000 last month, softer than the forecast of 210,000 and significantly lower than the upwardly revised prior reading of 261,000. The 2-year Treasury tumbled following the ADP report tumbled around the 3.80% region towards 3.76%. 

It looks like construction could be staging a comeback and leisure and hospitality remained strong, while manufacturing jobs posted a significant decline. The strength in this hiring came from mostly small businesses which is concerning as that part of the economy appears to be most vulnerable to the current banking crisis. 

ADP’s Chief Economist noted, “Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.” The US economy is clearly in slowdown mode and expectations should be for further labor market weakness.

ISM

The service sector is cooling.  The March ISM service index dropped from 55.1 to 51.2, well below the consensus estimate of 54.4.  The big miss was driven by weakening demand as new orders plunged from 62.6 to 52.2 as banking turmoil and a rising recession weighed on the outlook.    

13 service industries reported growth, while 5 industries reported a decrease. The comments from the respondents were mixed but still mostly support a slowdown for the second half of the year. 

FX

The dollar rallied against the euro as recession worries triggered safe-haven flows. Investors are more confident that we are going to see a much harder economic downturn in the second half of the year and that is starting to have a lot of traders go defensive, which doesn’t bode well for the euro.