While today's job report will be of far lower importance with geopolitics, war, stagflation and commodity hyperinflation taking precedence, investors will nonetheless watch the latest job data due at 830am for clues about the next move from the Federal Reserve.
Consensus expects the February jobs report at 8:30am ET to show nonfarm payrolls increase of 423k vs 467k in January, with the Bloomberg crowd- sourced whisper number slightly lower at 401k. Notably, the pace of hiring is expected to confirm Fed’s assessment that the labor market is strong enough to withstand rate hikes. The unemployment rate is expected to decline to 3.9%.
As Newsquawk notes, Indicators of labor market activity have been constructive in February. ADP’s gauge of payrolls surprised to the upside (although analysts have been dismissing the predictive significance of the data), initial jobless claims and continuing claims data both eased in the survey week vs January levels. Survey data continues to allude to tight labor market conditions, which will support wage gains; the Fed’s Beige book said firms were increasing compensation to attract workers, especially in low-wage positions, but with only mixed success.
Traders will use the February jobs data to inform the debate on how the Fed will normalize monetary policy: money markets had priced a 50bps increment rate hike at the Fed’s March meeting, and had penciled in seven rate hikes this year, but following the Russian invasion of Ukraine, markets have coalesced around a 25bps incremental move, and see around five hikes in 2022. However, with the Biden administration making inflation its ‘top priority’, many suggest the Fed will have to stay in inflation fighting mode; accordingly, the central bank will be data dependent about future policy moves, including the increment of rate rises.
Here are the main things to watch:
POLICY DEBATE: Traders will use the data to inform the debate on how the Fed will continue to normalise monetary policy in the months ahead. Up until recently, money markets were pricing in seven 25bps rate rises from the Fed in 2022, and had expected the central bank to lift rates by a 50bps increment at the March 16th meeting. However, the Russian invasion of Ukraine has put central bankers in a more cautious mood; now, money markets are pricing around five Fed rate rises this year, and see a 25bps incremental hike in March. Chair Powell – and some other Fed Governors – have retained the option of using a 50bps move; Powell said that if the Committee were to hike rates by 25bps for three consecutive meetings and it transpired that was not enough, it could raise rates more quickly. Additionally, there is also a degree of political pressure to keep the Fed in inflation fighting mode; President Biden in his State of the Union address emphasized that tackling inflation was his ‘top priority’. This comes as some argue that the inflation dynamics have significantly soured consumers' view of the economy: a recent poll found that more than half of respondents believed the US was in a recession or depression, despite GDP growing 5.7% in 2021 and the economy adding more than 6mln jobs.
HEADLINE: The consensus looks for +400k nonfarm payrolls in February (range: 200-730k, prev. 467k); the unemployment rate is seen falling by one-tenth to 3.9%. The ADP’s gauge of payrolls surprised to the upside in February (475k vs exp. 388k), while the prior month's data saw a significant upward revision (from -301k to +509k). The ADP data has drawn criticism from many market analysts, however, which back fits the official payrolls data; the official January BLS data saw an upside surprise which analysts said underpinned January’s revision higher. “It makes no sense to care about this number or react to it,” Pantheon Macroeconomics said, “it is statistically insignificant as an indicator of the official payroll numbers when compared to the Homebase numbers and mean-reversion,” and Pantheon added that “the revisions can be huge, rendering the initial estimates meaningless.” Meanwhile, initial jobless claims data for the week that coincides with the traditional BLS survey week fell to 249k vs 290k for the January data reference week, while continuing claims data declined to 1.576mln from 1.651mln.
BEIGE BOOK: The Fed's latest Beige Book notes that employment increased at a modest to moderate pace. Widespread strong demand for workers remained hampered by equally widespread reports of worker scarcity, though some Districts reported scattered signs of improving labour supply. Many firms had difficulty maintaining their staffing levels due to high turnover, exacerbated by COVID-19 disruptions in January, though workers and firms recovered more quickly than during previous waves. Firms continued to increase compensation and introduce workplace flexibility to attract workers—especially in historically low-wage positions—though with only mixed success. Respondents also said that they expect the tight labour market and consequent strong wage growth to continue, though a few Districts reported signs of wage growth moderating.
BUSINESS SURVEYS: The employment index within the ISM manufacturing survey registered 52.9, 1.6 points lower than January; the services ISM is released after this note goes to publication. Markit's gauge of manufacturing activity noted that although the sector had rebounded after Omicron, output remained heavily constrained both by ongoing raw material supply bottlenecks and labour shortages; the data-compiler said that the decline in virus case numbers should help to alleviate labour shortages into the spring. And Markit's services PMI saw private sector employment expand further in February, taking the current sequence of job creation to 20 months; Markit said the increase was the strongest since last May.
ARGUING FOR A STRONGER THAN EXPECTED REPORT:
- Public Health. After reaching new highs in December and early January, covid infections fell sharply in the last week of January and throughout the month of February. While January payroll gains were much larger than expected, Omicron nonetheless weighed on the January report. As shown in Exhibit 1, payroll growth was below trend by 66k in industries where workers are generally paid by the hour (salaried workers generally have sick-leave benefits and would continue to be counted in the payroll statistics even if missing work due to covid). Additionally, the household survey indicated 762k people missed work due to covid (mom sa). the Omicron payroll drag was somewhere between these two estimates, and Goldman assumes 200k such workers returned to work by the February survey week.
- Dining activity. Dining activity rebounded sharply in February—more than recovering its Omicron-driven declines in December and early January. Coupled with the rise in ADP’s estimate of leisure and hospitality jobs, expect a significant contribution from leisure-sector payrolls (Goldman's estimates embeds a rise of around 200k).
- Big Data. High-frequency data on the labor market generally indicate strong growth in February employment (see Exhibit 3). Note that we adjust the Google and Household Business Pulse series for their January errors—at face value the February changes would be consistent with multi-million job gains
- ADP. Private sector employment in the ADP report increased by 474k in February, above expectations for a 375k increase and consistent with strong growth in the ADP panel.
- Employer surveys. The employment components of business surveys generally increased in February. Goldman's services survey employment tracker increased 1.0pt to 53.9 and our manufacturing survey employment tracker increased 1.2pt to 57.4. The Goldman Sachs Analyst Index (GSAI) edged down by 0.2pt to 68.0 in February, and the employment component declined by 4.2pt to 64.3. Job cuts. Announced layoffs reported by Challenger, Gray & Christmas decreased by 8% month-over-month in February after decreasing by 18% in January (SA by GS).
ARGUING FOR A WEAKER THAN EXPECTED REPORT
- Education seasonality. Education weighed on job growth during the fall, likely because some janitors and support staff declined to return for the new school year. Expect a similar drag in the February report following the end of winter breaks. Assume a 100k drop in education payrolls.
- Vaccine mandates. The vaccine mandates for healthcare workers announced by the Biden administration apply to roughly 2-3mn unvaccinated workers. These mandates began to be enforced in January and February, and may have weighed on healthcare job growth in the jobs report.