ADP & Claims: Big ADP Surprise, Claims Inch Higher

Bottom Line:   ADP reported sharply better-than-expected hiring again in June (the third consecutive beat). Hiring was most robust in the leisure and hospitality segment but only modestly higher than the averages of the last few months. The big surprises came in trade, transportation and utilities, education and health services, and construction. While the headline gain and the gains within education smell of difficult seasonal adjustments and last June's payroll data also stood out, the breadth of gains across many sectors suggests the seasonal impact was modest. Moreover, the government's nonfarm payroll report was also stronger last June and tracked the gains (albeit to a lesser extent) seen in ADP then. Finally, while the major sectors saw strong gains, ADP reported continued job losses in manufacturing, finance, information, and business services. Overall, the ADP report showed a robust labor market that is certainly not cooling much, if at all, and it leaves scope for an upside surprise of the 225k consensus gain expected tomorrow for June's nonfarm payroll survey. Separately, jobless claims rose modestly, as expected. The trend remains to the upside, albeit very slowly, offering hope that the labor market was cooling more than the ADP report suggested. Adding to the mixed signs for markets, the week that included the 12th of June, the survey week for nonfarm payroll, saw 265k jobless claims, an elevated week. Taken together, ADP offers scope for an upside surprise in tomorrow's payroll release, but claims suggest any such surprise should be much more modest than the ADP surprise today, with nonfarm payrolls coming in the 280-310k area, 20-30% higher than consensus.