Warm up act to the jobs report

ADP's private sector payrolls and international trade data are big for U.S. markets Wednesday, but the focus first will be on Europe.

Markets on Tuesday were dominated by Europe, even as U.S. car sales rocketed higher to an annualized selling rate of 17.7 million vehicles, the best level in 10 years. The dollar weakened as the euro gained on optimism Greece would come to a deal with creditors, and U.S. rates followed European yields higher. The U.S. 10-year was at 2.26 percent in late trading, while the German 10-year rose above 0.71, its highest yield of the year.

The European Central Bank holds a rate meeting Wednesday and should have an announcement at 7:45 a.m. ET, after which ECB President Mario Draghi speaks to the press. No change in rates is expected, but Draghi may comment on the progress of the the bank's quantitative easing program in his 8:30 a.m. comments. Traders though will also be watching for news on Greece's debt talks.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

"I think he would wait for the finance ministers to speak. I don't think Draghi would say anything on his own about Greece," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

Traders are already looking ahead to Friday's nonfarm payrolls, expected at 225,000, so ADP's May report is an important warm up to the government data. ADP is expected to announce 200,000 jobs at 8:15 a.m. ET, up from 169,000 last month, according to Thomson Reuters. The government's report of 223,000 April nonfarm payrolls was well above the ADP number.

"ADP could be big. We've been reacting to it. If it's a 150,000 number, or something like that, if it's bad, bond yields could come down here. But the primary driver is what's going on in Europe and European yields," said Rupkey.

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The ISM nonmanufacturing survey is reported Wednesday, and the market is also focused on the employment component of that number.

"We need these anecdotes from ADP and ISM, all the things that will come in over the course of the next 48 hours before we start to hear updated, nonpublished estimates" of Friday's job number, said Ian Lyngen, senior Treasury strategist at CRT Capital.

Each month, traders speculate about whether the jobs number will be better or worse than expected, and some traders reported hearing speculation the number would be weaker than expected. But the real buzz will begin after the ADP report.

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Art Cashin, director of floor operations for UBS at the NYSE, said the key thing for markets will be Draghi. "ADP will be watched but I don't think the markets have fully embraced it yet," said Cashin.

Rupkey said the export number in the trade report will also be key. "We get one of (Fed Chair) Janet Yellen's risks out there ... exports. Exports got killed early in the year here," said Rupkey. "Partially we did have the West Coast dock strike. We had weather. ... If the Fed's concerned about weak data, the weakest of the weak data has been exports."

The export number in the first quarter was a drag on GDP, which contracted 0.7 percent.

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"Any big rise would be important if it were up 4 or 5 or 6 percent," said Rupkey. "It came down double digits. If it strikes back in the opposite direction by a significant amount that might be an interesting story. One more headwind that is fading."

Lyngen said besides Europe, rates also rose on Tuesday's better ISM manufacturing data and on the lack of liquidity in the bond market. "There has been a reduction in the willingness to take risk ahead of these big numbers. Just generally speaking, no one is willing to stand in front of these moves," he said.

Rupkey said nonfarm payrolls could pack a surprise that might impact the Fed's thinking on rate hikes. "The money number is going to be the unemployment rate. Yellen drew a line in the sand about 5 percent being full employment. I think the expectations are for unchanged, but there's a chance it would fall more than expected. It could go to 5.3 percent," he said. The consensus is for an unemployment rate of 5.4 percent.

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What to Watch

European Central Bank President Mario Draghi briefs the press, after the ECB's 7:45 a.m. ET rate decision. 8:30 a.m. ET

ADP private sector payrolls for May expected at 200,000, up from 169,000 in April. 8:15 a.m.

U.S. trade balance expected to have declined by $44.0 billion in April, compared to $51.4 billion previously. 8:30 a.m.

Services PMI May final is expected at 56.3, compared to 57.4. 9:45 a.m.

ISM nonmanufacturing expected at 57, down from 57.8 in April. 10:00 a.m.

The Fed releases its Beige Book on the economy. 2:00 p.m.

Chicago Fed President Charles Evans speaks at the Chicago Banking Symposium and takes questions. 2:15 p.m.

St. Louis Fed President James Bullard speaks on monetary policy normalization at 4:00 p.m.

Earnings are expected from Brown-Forman, Vera Bradley and Five Below.