Friday, February 5, 2016

Ahead of Today's Report: "It is Not All About U.S. Jobs"

From Marc to Market:
The US nonfarm payroll report typically dominates the first Friday a new month.  In recent years, it has become among the most important economic reports globally.  Not today.  
The market's focus has shifted from Chinese stocks and yuan that dominated the first week or so, then oil, and now it is heightened concern about a US recession.  This means there is likely to be an asymmetrical response to the jobs report.  Stronger than expected data is unlikely to deter those who think the US is in or about to enter a recession.  They will dismiss the employment data as backward looking, and a lagging indicator.  A poor report will likely encourage new dollar sales and investor anxiety. 
The consensus is for nonfarm jobs to have grown by a little less than 200k.  They averaged 284k in Q4 15and 174k in Q3 15.  The risk is to the downside, given the trend increase in weekly jobless claims and the softness in ISM data.   Some of the large gain in December may have been tied to unseasonably warm weather for much of the country, and a part may have been unwound. 
It is possible that the unemployment rate ticks down to a new cyclical low of 4.9%.  Hourly earnings are expected to have risen 0.3%, but given the base effect, will not be enough to prevent the year-over-year rate easing back to 2.2% from 2.5%.    
Note too that there will be annual benchmark revisions.  The preliminary projection by the BLS is that the March 2015 level employment will likely be revised down by around 210k. 
There have been two reports this week that have heightened concerns about a US recession.  First, was the tightening of credit conditions reported in the Survey of Senior Loan Officers. This is the second quarter of tightening.  This is a common factor in many models that assess the odds of a recession.  The second report was the service ISM.  It fell the most in more than two years, and at 53.5 is the lowest since February 2014.  The manufacturing ISM has been below the 50 boom/bust level since last October. 
Our approach to the Federal Reserve has been to place emphasis on comments from the leadership.  Last August, NY Fed President Dudley suggested that a rate hike was less compelling, and this was a hint that the Fed would not hike rates in September.  This week he cautioned about the tightening of financial conditions.  Of course, with the January meeting a week ago, the March meeting is still some time off, much can change....MORE