Ok, well markets have had a couple of hours to absorb and ponder the February jobs report which of course beat handily on the headline while missing on the AHE front, a decidedly favorable outcome for stocks, given that the main risk heading in was another average hourly earnings beat.
You can delve as deeply into this as you want, but a couple of things seem pretty clear. For one thing, that goddamn headline number (the 313,000 print) is “bigly”, so you can expect a lot of crowing about it from a certain Twitter-prone “stable genius” once someone explains to him how “bigly” it in fact is.
there's still no word from noted FX strategist David Dennison of 1600 Penn. Securities on today's blockbuster jobs report
— Walter White (@heisenbergrpt) March 9, 2018
Also, it looks like there’s still some slack in the labor market and that has obvious implications for the Fed. Still, the robust growth outlook portends a return of inflation pressures at some point, so you probably want to keep that in mind, lest you should get caught off guard again like you invariably were last month when the AHE print tanked everything.
For those of you who don’t give a shit about any of that and just want to know whether it’s safe to buy any dip that comes along, I guess the answer is “yes” (for now) although don’t forget that just because President Dennison ended up backing down from the whole “no exemptions” line on the tariffs by no means suggests we’re out of the woods on that. Just this morning, Merkel’s bloc called Trump’s tariffs (and by extension Trump himself) “absurd”, for instance.
Oh, and we still have to see how effective Powell ends up being at communicating. Forward guidance is an art not a science and then there’s the dots …. oh God, the dots.
In any event, here is some of the early analyst commentary that will of course continue to trickle in throughout the day from whoever hasn’t already headed out to the bar (which is where I would have been by now on a payrolls Friday were this two years ago).
Despite softer wage growth numbers in the latest U.S. jobs report, February’s payrolls report will be remembered for its unusually strong growth elements and should support the dollar.
It’s risk positive on the surface, but when the growth implications are fully digested, inflation fears will easily resurface. Data plays to an eventual test of 3% for 10Y yields and ultimately is likely to be USD positive.
The February employment report showed that both the demand and supply of labor increased, preventing wage pressures from picking up. Nonfarm payrolls were exceptionally strong with an increase of 313k in February and net positive revisions of 54k. The household survey was even stronger with household employment increasing by 785k and the labor force adding an additional 806k to the economy. Consequently, the labor force participation rate increased to 63.0% from 62.7% showing an impressive increase in the supply of labor which kept the unemployment rate down at 4.1%. The one weak component in the jobs report was wage growth: average hourly earnings increased by a tepid 0.1% mom which translated into 2.6% yoy as average weekly hours worked picked up after a temporary drop. Today’s “Goldilocks” report suggests the business cycle still has another leg to go: the labor supply is increasing to meet the gain aggregate demand, preventing price pressures from building too aggressively.
The data since the last FOMC meeting have been constructive for a rate hike in March. Inflation numbers have firmed and the labor market continues to expand at a healthy pace with limited wage pressures. Although wage pressures remain muted, doves appear to be less worried as the balance of risks has shifted higher. For example, in remarks this morning, Chicago Fed President Evans sounded more positive on the outlook and appeared willing to be swayed into a faster hiking cycle. Also, Governor Lael Brainard and Atlanta Fed President Bostic’s comments recently struck a more positive tone on the economy. This will likely lead to an incremental shift in the dots in the new set of economic projections but unlikely to shift the median higher.
Nonfarm payrolls rose 313,000 in February with the three-month average at a solid 242,000 jobs. Job gains are consistent with 2.5-3.0 percent economic growth in the first half of 2018, with steady consumer spending, better business investment and a likely FOMC March rate hike, soon followed by another one in June. Jobs gains appeared in many sectors including business services, trade & transportation as well as education & health. Only information services jobs have declined in each of the past three months due to drops in jobs in telecommunications and motion pictures. Over the past three months, aggregate hours worked are up 3.1 percent – very solid and consistent with continued growth in personal income and consumption.
Contrary to the casual rhetoric, Granger causality tests reveal that inflation leads wages—not vice versa. This statistical result follows the theoretical model that workers and employers respond to higher inflation. Workers respond to inflation by trying to negotiate higher nominal wages to maintain a real wage standard. Employers find that higher inflation gives them the flexibility to raise wages and maintain profit margins.
Nominal average hourly earnings rose 0.15 percent in February and are up 2.6 percent over the year—slower than the January pace. While job growth remains strong, the gradual rise in earnings over the past six months signals higher incomes but also pressure on profits as firms have modest top-line pricing power. Longer term, subdued inflation readings and weak productivity numbers suggest limited gains in nominal wage growth.
For those who like bullet points, here’s a ton more compiled by Bloomberg:
- Academy Securities (Peter Tchir, note)
- “Great headline number, strong revisions, nice uptick in manufacturing” and an impressive surge in the labor participation rate
- Data may be a sign that tax-reform effects are kicking in
- Scenario is “bad for rates, should push yields higher”; expect yield curve to steepen
- For equities, it’s a very positive “Goldilocks” scenario, “if you believe the no inflation pressure” message
- Bleakley Advisory (Peter Boockvar, note)
- Overall, “jobs number was good and puts the pace of private sector job gains above the recent trend”
- Treasury market is responding with higher yields, “as it should”
- Fed on course to lift rates in March to levels that will be still low, given jobs numbers and the stage of this expansion
- “We’d be much better off if the Fed was further along its rate hike cycle, but instead they are playing quite a game of catch up”
- Expect a continued rise in bond yields as a result
- TD Securities (Mark McCormick, note)
- “Massive” upside in NFP offsets the moderation in wage numbers, as the market expected some pullback
- Payrolls report is “marginally positive” for the dollar; EUR/USD should retest 1.2150, USD/JPY will eye 108 before fading
- FTN Financial (Chris Low, note)
- Payroll gain was largest in more than 1.5 years, “but wage pressure retreated” and additions to workforce kept unemployment rate stable
- Tax cuts are already boosting hiring but that’s not a cause for concern given that “it’s not causing wages to accelerate or the unemployment rate to drop”
- That’s the “way the Fed is likely to see it too”
- Marketfield Asset Management (Michael Shaoul, note)
- Despite soft wage data, labor data is consistent with acceleration “towards the point that slack will be eliminated”
- Feb. job gains and prior month revisions lift 12-mo. moving average to more than 190,000, just below 240,000 reached at this time last year
- AHE not in line with “plenty of anecdotal evidence that wage pressures are building and that labor scarcity is becoming more of an issue”
- Fed has clear case to lift rates in March and there’s a case for four hikes in 2018, yet FOMC probably won’t signal that this month
- CIBC (Andrew Grantham, note)
- “February data confirmed our suspicion that last month’s strong wage figure was largely an illusion”
- Data show U.S. economy continues to grow strongly, yet wage numbers “should allay fears of a quick pick up in inflation and as such we still see the Fed hiking interest rates three times this year”
- Pantheon Macroeconomics (Ian Shepherdson, note)
- “The lack of a 3-handle on the unemployment rate makes it easier for the Fed to stick to the narrative of gradual normalization”
- With markets expecting almost three hikes this year, and earnings likely to beat consensus, “that’s no threat to valuations even if the Fed hikes four times, as we expect”
- Core payroll growth “very strong and broad-based”
- ING Bank (James Knightley, note)
- On face value, labor reports seems “a fantastic story,” signaling surge in new hires, workers returning to labor force and little wage pressure
- Yet there are some doubts, as other data such as those on small business indicate they are “struggling to find workers” and many were forced to raise pay, as Thursday’s National Federation of Independent Business labor survey showed
- JOLTS data indicated only one unemployed worker for every new job opening and it’s taking longer to fill vacancies
- Sees risk that headline consumer price inflation could hit 3% this summer, and therefore expect the Fed to lift rates four times this year