KEY DATA: ISM (NonManufacturing): +3.6 points; Orders: +5.7 points; Hiring: +3 points/ HWOL: -226,700; Trade Deficit: $3.8 billion wider

IN A NUTSHELL: “With activity rebounding in services and strengthening in manufacturing, it is unclear why firms are not looking for more workers.”

WHAT IT MEANS: Friday’s employment report is a critical one given the uncertainty created by the Brexit vote. If you believe those at the forefront of business activity, the nation’s supply managers, the June job gain should be a pretty good one. Today, the Institute for Supply Management (ISM) report on the non-manufacturing portion of the economy was much better than forecast. That came after last Friday’s report that manufacturing activity and hiring picked up in June. Orders surged, including both imports and exports, activity jumped and hiring rose solidly. In other words, the sector showed clear signs of accelerating from its more moderate growth pace of the past few months. Indeed, the overall index hit its highest level since last November. The only negative aspect of the report was that backlogs eased, which was odd given the robust rise in new demand. Still, when you are talking about most of the economy, it is good to see that conditions are firming.

Despite the indications that hiring was improving across the economy, at least according to the ISM, the Conference Board reported that online want ads dropped precipitously in June. There has been a major decline in advertising for positions this entire year. I had been assuming that it made no sense to advertise for openings that could not be filled because of the lack of workers. Now, though, the length and breadth of the decline makes me wonder if we are indeed in the middle of a major hiring cut back. We should have a better idea on Friday whether the supply managers or the online want ads better represent what is happening in the labor market.

The trade deficit widened more than expected in May. Much of that had to do with the increase in petroleum prices. In addition, there was a jump in non-monetary gold imports, which doesn’t mean much. However, the large rise in consumer goods imports points to an improving household sector, which bodes well for U.S. growth. Exports were off slightly, with declines reported in most categories. The rest of the world is still buying lots of goods from the U.S., but not at a growing pace. Adjusting for price changes, the average for the first two months of this quarter remains below the first quarter’s average, so trade could add to growth.  

MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape, despite the sturm and drang in the markets. Brexit’s aftershocks are creating uncertainty in the equity markets and a worldwide rush to the security of U.S. Treasuries. Interest rates are cratering as the 10-year note has set new record lows. That is great for those of us, including myself, who are refinancing. But it also shows the Fed has little control over the yield curve. When uncertainty strikes, the safest port is U.S. assets and that means the Fed can only sit and watch. It also points out that movements in the yield curve may have little meaning for the U.S. economy. Until the implications of Brexit are clearer, volatility in the markets is likely to continue. And since market volatility paralyzes the Fed, don’t expect any rate hikes for a while, even if the economy really is solid and job gains rebound.