Why The Bulls Are Hoping For A Weak Jobs Number

In half an hour, the BLS will report the February unemployment rate and payrolls number which is expected to print as follows:

  • February jobs exp. 195K (Low 70K, High 245K), Prey. 151K, Dec. 262K
  • Unemployment Rate (Feb) M/M Exp. 4.9% (Low 4.8%, High 5.0%), Prey. 4.9%, Dec. 5.0%
  • Average Hourly Earnings (Feb) M/M Exp. 0.2% (Low 0.0%, High 0.4%), Prey. 0.5%, Dec. 0.0%

As we reported previously when looking at coincident withheld income and payroll taxes, which have dipped in recent months, we noted that according to research shop TrimTabs, the actual number is likely far lower: it estimates job growth in February was 55,000 to 85,000 - call it 70,000 - the lowest number in two years.

Ironically, a weaker jobs number may be precisely what the bulls are hoping for now that Fed rate hikes are back again on the horizon. Here is Bloomberg's Mark Cudmore explaining why a match or a beat to expectations may be the worst case scenario for stocks, which have surged over the past few weeks on hopes of more stimulus, whether from the G-20, the ECB, China or Japan. In this environment, a repricing of rate hike odds could be just the catalyst that ends the short squeeze.

Here is Cudmore explaining why "A Hike Could Be on the Horizon"

Futures markets price only a 35% probability of the Federal Reserve hiking by June. If today’s labor data doesn’t disappoint, that likelihood could easily double within the next two weeks. 

 

Despite market distractions, the statutory objectives of the Fed are maximum employment, stable prices and moderate long- term interest rates.

 

According to the FOMC’s December ‘Summary of Economic Projections’ report, “Committee participants’ estimates of the longer-run normal rate of unemployment ranged from 4.7 to 5.8% and had a median value of 4.9%.” Today’s unemployment figure is forecast to be 4.9% for a second consecutive month.

 

So the Fed is bang on target as regards the employment part of its mandate. The other part of the equation is price stability. Crucially, that means pre-empting inflation to ensure policy doesn’t get behind the curve in the quest for “moderate long-term interest rates”.

 

This pressure to forecast the trend, combined with the fact that monetary policy only impacts inflation with a considerable lag, means they can’t be complacent.

 

The last 16 price-related U.S. data releases on Bloomberg that have analyst consensus forecasts have all -- yes, all - - beaten expectations. That’s a pretty incredible trend. Headline inflation, core inflation, producer inflation; take your pick. They have surprised to the upside.

 

After last year’s erosion of their credibility through perceived poor communication, the Fed will not dare surprise the market by delivering a hike that is not priced. So action at the March 16 meeting is unlikely.

 

But it’ll be a perfect opportunity for Janet Yellen to adjust market pricing and pave the way for a hike in the second quarter. The onus is now on the data to derail a hike, no longer to prove one is needed.

And some additional thoughts from Richard Breslow:

It’s the most important number, it’s just another data point. Today’s release of non-farm payrolls data is expected to show another solid performance, reinforcing the notion that jobs growth is running solidly above the neutral rate needed to maintain downward pressure on unemployment. It won’t change the Fed’s calculus for timing interest rate hikes.

 

Job growth has been undeniably strong. Inflation-related statistics have been beating analyst estimates. This is all good. It will allow Fed speakers to talk tough. After eight long years it feels good for them to talk mano a mano. If it translates into the notion that the FOMC is again on a proactive path, global markets will put them back in their place

How would it put the Fed "back in their place"? Why, by selling off again of course.

All of which may explain why for the second month in a row, the whisper jobs number is substantially weaker, with some estimates as low as 140,000.