LIVE MARKETS-Hump day data dump: ADP misses, services PMI contracts, mortgage demand softens

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HUMP DAY DATA DUMP: ADP MISSES, SERVICES CONTRACTS, MORTGAGE DEMAND SOFTENS

A handful of generally downbeat data greeted investors on Wednesday, with signs of economic softening upping the ante for ongoing tariff talks.

Private employers increased their payrolls by 37,000 in May, according to payrolls processor ADP, marking an unexpected 38.3% drop from April and delivering about one-third of the jobs analysts predicted.

While ADP's National Employment index USADP=ECI is not a reliable predictor of official Labor Department data, the number falls 87,000 short of the 120,000 private payrolls gains analysts expect Friday's employment report to show.

"In the current environment, today’s downside surprise could raise more eyebrows than usual," writes Chris Larkin, managing director at E*TRADE from Morgan Stanley. "Some tariff-related slowdown in the labor market is expected, the question is how significant it will be, and how the markets will respond. This month could begin to provide some answers."

The graphic below tracks ADP's NEI and measures its accuracy (or lack thereof) relative to Labor Department data. For example, last month ADP's NEI undershot official private payrolls by 107,000.

Next, the services sector dipped into contraction last month, or its expansion gained momentum, depending on whom you ask.

The Institute for Supply Management's (ISM) non-manufacturing purchasing managers' index (PMI) USNPMI=ECI unexpectedly dropped 1.7 points to print at 49.9, dipping just a hair below 50, the dividing line between contraction and expansion.

Consensus called for a 0.4 point increase to an even 52.0.

A closer gander at the index's subcomponents shows new orders dipped into contraction while employment moved in the opposite direction. The pre-tariff inventory bump faded as that component sank into contraction.

Prices paid - an inflation predictor - jumped 3.6 points to 68.7, the subindex's hottest level since November 2022.

"After an initial surge in front-loaded demand, uncertainty is paralyzing many businesses and halting new orders as customers navigate tariff policy," writes Matthew Martin, senior U.S. economist at Oxford Economics. "While one month’s reading doesn't make a trend, the report does support our forecast for slow growth and higher inflation throughout the year."

"The prices index signaled businesses are seeing a rapid rise in costs as the full effect of tariffs takes hold," Martin adds.

Commentary from survey participants is littered throughout with the words "tariffs" and "federal budget cuts" and "uncertainty."

On the other hand, S&P Global's final take on May services PMI USMPSF=ECI, offers a cheerier view. Its index moved in the opposite direction, its expansion gathering velocity, gaining 2.4 points from April's final reading.

That's a 0.9-point upgrade from their advance "flash" take released a couple weeks ago.

"Service sector growth has improved more than first estimated in May, with confidence about the year ahead also lifting higher, buoyed in part due to pauses on higher rate tariffs," says Chris Williamson, Chief Business Economist at S&P Global. Companies have matched that optimism with increased spending and hiring."

S&P Global and ISM indexes differ in the weight applied to their various components.

This chart shows the extent to which the dueling PMIs' agree (or not). It would appear they are generally on the same page with respect to manufacturing PMI, but they part ways at services:

Pivoting to the housing market, the cost of financing home loans eased a bit lower last week, but on the other hand, so did mortgage demand.

The average 30-year fixed contract rate USMG=ECI shaved six basis points to 6.92%, according to the Mortgage Bankers Association (MBA).

That's too rich for would-be borrowers' blood; demand for loans to buy homes USMGPI=ECI dropped 4.4%, and applications to refinance existing mortgages USMGR=ECI, which last week accounted for 35.2% of the mortgage pie, slid 3.5%, resulting in a composite decrease of 3.9%.

Mortgage rates have been "in the 6.8 percent to 7 percent range since April," said Joel Kan, MBA’s deputy chief economist. “Refinance activity fell across both conventional and government segment and the overall average refinance loan size was the smallest since July 2024, as potential borrowers hold out for larger rate drops."

The average 30-year fixed rate is 15 basis points cooler than the same week a year ago. Over the same time period purchase and refi demand have increased 17.2% and 41.6%, respectively.

(Stephen Culp)

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