By Senad Karaahmetovic
Fed Chair Jerome Powell initiated a stock selloff earlier this week by saying that the central bank would be ready to pick up the pace of rate hikes if the “totality” of the data warrants it. The market is now slowly shifting its focus toward the jobs report that is due to be released tomorrow at 8:30 ET (13:30 GMT).
The Fed is looking for a slowdown in hiring before preparing to stop hiking rates. The ‘jobs market is cooling’ narrative suffered a major blow last month after the BLS data showed the total nonfarm payroll employment increased by 517,000 in January.
We learned yesterday that private payrolls in February rose by 242,000, a stronger-than-expected number as economists were looking for an increase of 200,000 after 119,000 in January.
“There is a tradeoff in the labor market right now,” said ADP’s chief economist, Nela Richardson.
“We’re seeing robust hiring, which is good for the economy and workers, but pay growth is still quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near-term.”
The NFP expectations/consensus
The Street is forecasting that the U.S. economy added 225,000 jobs in February, according to 69 economists surveyed by Bloomberg. The forecast ranges between 183,000 and 271,000.
The unemployment rate and the labor force participation rate are expected to stay at 3.4% and 62.4%, respectively. The average hourly earnings are seen growing 0.3% month-over-month (MoM) and 4.7% year-over-year (YoY).
Here is what Wall Street analysts and economists have to say about tomorrow’s jobs report:
Credit Suisse: “February data could deliver +220-240k [Street +215k; +517k prior] jobs. Leading indicators suggest steady, slower job growth versus January’s +517k jump. Consistent with these trends ADP reported FQ2 1/25—reaffirming its overall guidance while highlighting some pockets of weakness in PEO.”
Citi: “While exceptionally strong +500k job growth in January is unlikely to repeat in Friday’s data for February, we expect still-strong 255k job growth, reflecting that, if anything, underlying labor market conditions to start 2023 are stronger than we would have thought ~6 months ago. In our base case, average hourly earnings rise 0.4% MoM in February and the unemployment rate remains at a low 3.4%.”
Morgan Stanley: “We expect nonfarm payrolls increased by 190k in February with an uptick in participation from 62.35% to 62.39%, which should keep the unemployment rate at 3.4% in February. We expect average hourly earnings to increase by 0.3%M, raising the year-over-year rate to 4.7% due to base effects.”
Vital Knowledge: “Whispers” are up around 275-300K. ~300K seems to be the “line in the sand” for many.”
NFP + CPI key for Fed
The NFP report has the ability to move the markets and is much more than just the headline number. In addition to next week’s CPI report, it is likely to determine what the Fed will do on March 22.
Another hotter-than-expected jobs report could prompt the Fed to hike by 50 basis points later this month. On the other hand, stocks could rally on a cooler-than-expected number as bulls will say the January report was an isolated incident.
Here, analysts discuss how to play tomorrow’s jobs report and its implications for the Fed:
Sevens Report Research: “If tomorrow’s Jobs Report is “Just Right” and next week’s CPI report comes in under expectations (and declines from January) then investors will breathe a sigh of relief as it’ll be much less likely the Fed hikes 50 bps in March or takes terminal fed funds above 5.625% (which is currently priced in). And those numbers could spark a rally back above 4,000 in the S&P 500.”
“However, if the jobs report is “Too Hot” and/or the CPI report is higher than estimates and rises from January, then markets will fully price in 50 bps and a greater chance of terminal fed funds above 5.625%, and that will put more pressure on markets, and we should not be shocked if the S&P 500 give back all of the 2023 YTD gains.”
Citi: “Stronger job growth (+300k) or a further pickup in average hourly earnings (0.5% or more) would likely further fuel market expectations for a possible 50bp rate hike on March 22. Next Tuesday’s CPI report will be the final key input into that decision, which for now we continue to expect as a 25bp hike.”
Argus: “[We expect] nonfarm payrolls to come sharply off January’s surprise gain of more than half a million jobs, while remaining positive across 2023.”
Vital Knowledge: “Assuming neutral CPIs/PPIs, we think 225-290K keeps the Fed pace at 25bp with the 2023 dot up no more than 50bp (remember the ’23 dot from Dec was 5.1% and the market is currently pricing in ~5.65-5.7%, so 50bp would be no worse than feared). A range of 175-224K keeps the pace at 25bp with the 2023 dot up no more than 25bp. Anything that drops below 175K could call into question 25bp happening at all and probably keeps the 2023 dot unchanged. Above 300K risks 50bp and a 2023 dot that approaches 6%.”