Jobs Report Beats, Average Hourly Earnings Misses

There’s just one more hurdle to clear in what was, to say the least, an extraordinary week for geopolitics and markets.

Say what you will about Trump, but one thing you can’t say is that he doesn’t keep everyone on their toes. This week alone he’s started a trade war, forced Gary Cohn out of the White House thus purging one of the last globalist elements in the administration, been sued by a porn star, announced sweeping tariffs only to offer exemptions to everyone at the announcement ceremony, and arranged a meeting with Kim Jong-Un. Only David Dennison could cram that much drama, confusion, and outright hilarity into a five day stretch.

All eyes on Friday of course turn to February payrolls and, more to the point, to average hourly earnings. The AHE print has taken on increasing importance over the past year and starting last month, it became the market’s bogeyman par excellence, after an upside surprise that betrayed the briskest pace of annual wage growth since 2009 exacerbated the bond rout and set the stage for the harrowing bout of flash-crashing madness that sent global stocks careening into a correction the following week.

Since then, we’ve heard from new Fed chair (and guy who really wishes he hadn’t taken this job) Jerome Powell, who told Congress the incoming data has strengthened his view that inflation is moving sustainably up to target. That was a hawkish surprise and it heightened jitters that the Fed may be inclined to try and squeeze in more hikes than the market is pricing this year. We’ve heard from more Fed officials since then including  Lael Brainard, whose uncharacteristically hawkish demeanor at an event in New York this week underscored the upside Fed risk. 

All of that is playing out against a deteriorating fiscal backdrop that’s seen David Dennison Donald Trump go out on a limb by piling expansionary fiscal policy atop an economy operating at full employment. Of course that fiscal gamble will be deficit-funded, which means Treasury supply is increasingly materially just as the Fed attempts to wind down the balance sheet (think: unfavorable supply/demand dynamics). Throw in the possibility that trade wars could be inflationary and you’ve got a rather interesting setup.

So that’s the backdrop for this morning’s jobs report. Here are three bullet points from Goldman’s preview:

• We estimate that nonfarm payrolls increased 210k in February, 5k above consensus. We believe warmer weather and unseasonably light snow during the survey week boosted job growth in the month. Labor market fundamentals also appear solid and may have improved further, given new cycle records for initial claims and Conference Board job availability.
• Following a fourth consecutive 4.1% reading, we estimate the unemployment rate fell to 4.0% in February, as the underlying trend in job growth likely remained strong. Additionally, a sharp unexplained rise in African American jobless rates seems likely to reverse, after adding a tenth to the January unemployment rate.
• We estimate a 0.3% month-over-month increase in average hourly earnings. One popular narrative in the marketplace is that January’s strong wage numbers resulted from a weather-related decline in the workweek. However, we believe workweek effects on wages primarily relate to calendar configurations (as opposed to weather), and in any event, the January wage strength was not concentrated in industries with a declining workweek. We anticipate a boost to average hourly earnings from favorable calendar effects in February. However, we see the risks to this estimate as skewed to the downside as the calendar effect is not particularly large, and we estimate the year-over-year rate fell a tenth to +2.8%.

Barclays is at 200K (0.1% m/m and 2.7% y/y on average hourly earnings). Notably, BofAML is well below consensus on the headline payrolls number. “We look for nonfarm payrolls to increase by 160k in February, a modest deceleration from the 200k increase in January,” the bank wrote on Sunday, adding that “some sectors such as trade, transportation and warehousing and retail trade will experience some negative payback after a strong performance in January.”

The whisper number on AHE is +0.3% m/m, which would be marginally higher than the median survey forecast of +0.2%.

Estimates and priors:

• Change in Nonfarm Payrolls, est. 205,000, prior 200,000
• Change in Private Payrolls, est. 205,000, prior 196,000
• Change in Manufact. Payrolls, est. 15,000, prior 15,000
• Unemployment Rate, est. 4.0%, prior 4.1%
• Underemployment Rate, prior 8.2%
• Average Hourly Earnings MoM, est. 0.2%, prior 0.3%
• Average Hourly Earnings YoY, est. 2.8%, prior 2.9%
• Average Weekly Hours All Employees, est. 34.4, prior 34.3
• Labor Force Participation Rate, est. 62.7%, prior 62.7%

And without further ado:

Actual:

• U.S. Feb. Nonfarm Payrolls Rose 313k; Unemp. Rate at 4.1%
• Nonfarm payrolls forecast est. 205k
• Nonfarm payrolls, net revisions, 54k from prior two months
• Participation rate 63% vs prior 62.7%
• Avg. hourly earnings 0.1% m/m, est. 0.2%, prior 0.3%
  • Y/y 2.6%, prior 2.8% est. 2.8%
• Nonfarm private payrolls rose 287k vs prior 238k; est. 205k, range 150k-240k from 33 economists surveyed
• Manufacturing payrolls rose 31k after rising 25k in the prior month; economists estimated 15k, range 8k to 25k from 22 economists surveyed
• Unemployment rate 4.1% vs prior 4.1%; est. 4%, range 3.9%-4.2% from 79 economists surveyed
• Underemployment rate 8.2% vs prior 8.2%
• Change in household employment 785k vs prior 409k

aaaaand Goldilocks.

— Heisenberg Report (@heisenbergrpt) March 9, 2018