U.S. stocks rise after ADP data showing cooling labor market, downward revision to Q2 GDP

What’s driving markets

In a thinly traded session on Wednesday, U.S. stocks were attempting to extend their three-day winning streak as investors were focusing on the release of private-sector payroll data, hoping evidence of a cooling labor market could support an eventual pivot to monetary easing by the Federal Reserve.

Private sector payrolls rose by 177,000 in August, down from a revised 371,000 in the prior month, according to the payroll services firm ADP on Wednesday. Economists polled by The Wall Street Journal had forecast a gain of 200,000 private sector jobs in August.

“While the ADP report does not necessarily enjoy an exceptionally strong positive correlation with the government’s payroll report due on Friday morning, it nonetheless suggests that the overheated jobs market may be cooling — clearly what the Fed wants to see, as it should bring the labor market into balance,” according to Quincy Krosby, chief global strategist for LPL Financial.

Meanwhile, the U.S. economy grew at a somewhat slower 2.1% annual pace in the second quarter, revised figures show, with a slight downward revision from the preliminary 2.4% estimate.

Treasury yields fell on Wednesday with the policy-sensitive 2-year rate
BX:TMUBMUSD02Y
down 6 basis points, at 4.847%, while the 10-year Treasury yield
BX:TMUBMUSD10Y
shed 2 basis points, at 4.095%.

The S&P 500 index closed Tuesday at a three-week peak after Treasury yields slid sharply in response to signs of a softening labor market and waning consumer confidence. However, the end-of-the-month bounce for U.S. stocks will face its big test on Thursday morning when the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, is due out at 8:30 a.m. Eastern.

Annual U.S. inflation in July is forecast to creep back up to a rate of 3.3% from 3% in the prior month, while consumer prices are expected to rise another mild 0.2% for the month. The so-called core PCE is also expected to tick up slightly to 4.2% from 4.1% in June, according to Wall Street analysts polled by Dow Jones. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends. 

See: A stormy September for U.S. stocks may lie ahead. What investors need to know about Wall Street’s worst month.

Traders and investors alike want to see “follow through” in Wednesday’s market action, which could help to confirm that the uptick in market performance is a more viable move as the market heads into September, said Krosby.

Markets are in a mood where any data that may support a Fed policy pivot leads to an upside push in equities, said José Torres, senior economist at Interactive Brokers.

Still, Torres expects stocks to go lower from here. “August was sluggish, but the S&P 500 is at 4,500, only 2% away from the yearly high.”

“The Fed’s balance sheet is going lower. You are probably going to have one more rate hike from the Fed. Earnings have been all right, but not excellent. And right now we’re trading at around 19 times next year’s earnings – it is very high considering how high rates are,” Torres said in a call. He expects the S&P 500 to finish the year at around 4,300.

See: Why Goldman Sachs sees uptick in interest in hedge funds in new market regime

In other economic data, the U.S. trade deficit in goods widened 2.6% to $91.2 billion in July, according to the Commerce Department’s advanced estimate released Wednesday. Economists polled by Econoday were looking for the deficit to rise to $90.8 billion deficit.

Companies in focus

• Boat manufacturers and dealers dropped on Wednesday after manufacturer Mastercraft Boat Holdings
  MCFT,
  -12.26%
  forecast a steep drop in profit and sales for the year ahead and warned of soft consumer demand. Shares of Mastercraft tumbled 11.3%, while its rival Marine Products Corp.
  MPX,
  -6.28%
  fell 6.4%. Shares of Brunswick Corp.
  BC,
  -4.03%,
  the largest publicly-listed U.S. boat maker, declined by 3.5%.

• HP Inc.
  HPQ,
  -6.89%
  skidded 7.5% on Wednesday following an earnings report highlighted by a third straight revenue miss and warnings of a challenging economy for the PC and printer maker. Chief Executive Enrique Lores warned PC pricing has not “recovered as quickly,” but he said that the availability of AI products in late 2024 should “refresh” consumer and business sales.

• Rivian Automotive Inc.
  RIVN,
  +1.48%
  shares edged up 1.1% after the company said in a filing late Tuesday that its board has approved an increase in its chief executive RJ Scaringe’s annual base salary to $1 million, from $650,000, effective last Friday.

• Box Inc.
  BOX,
  -9.33%
  shares fell 9.5% after the company on Tuesday reported quarterly results that barely topped analyst revenue and earnings estimates, and offered weak guidance.

• Lyft Inc.’s stock
  LYFT,
  +5.80%
  soared 6.6%, after lead independent director Sean Aggarwal scooped up $1 million of the ride-hailing company’s stock, joining Chief Executive David Risher, who made a similarly sized purchase earlier in the month.