Thanks to Jerome Powell and the newly S&P-dependent Fed, markets managed to easily clear this week’s myriad hurdles, as “de facto easing“/”capitulation” on monetary policy easily trumped (get it?) worries about another government shutdown which now seems like a high probability outcome.
As far as the trade talks go, the soundbites were predictably upbeat even if we still haven’t seen any concrete signs that a resolution to the structural sticking points is imminent. Meanwhile, China’s economy continues to exhibit signs of deceleration.
The last two hurdles for markets before the weekend are payrolls and ISM.
The Fed is obviously inclined to lean on data dependence to justify an overtly dovish lean, and it now seems like the burden of proof is on the data to come in hot enough, for long enough to change their mind (i.e., to put 2 hikes back in play for 2019).
“Frankly, we walked away from [Wednesday’s] meeting and press conference thinking that the onus is now on the data to get the Fed to hike even once this year”, SocGen wrote on Wednesday evening. That sentiment was generally echoed across desks. “Our main concern is that hyper-data dependence means a reactive Fed, potentially whipsawed by market movements and absent clear direction”, Barclays lamented.
ISM is up later (and it will be watched closely in light of how bad the December number was). On jobs, you’re reminded that the December report was a blockbuster of epic proportions. Things were expected to moderate materially this month to ~165k (from 312k).
Assuming payrolls rise (which they did) it will be the 100th consecutive month of gains, despite the shutdown. Here’s what that looks like on a chart:
(Bloomberg)
Meanwhile, average hourly earnings continue to grow at a cycle-high pace.
For what it’s worth, Goldman was looking for 180k on the headline. “While employment surveys have continued to trend lower, January is not a hiring-intensive month in the first place, and low jobless claims suggest scope for another solid rise in seasonally adjusted payrolls”, the bank wrote, in their preview, adding that “while weather likely contributed to last month’s blockbuster report, January was also relatively warm and dry during the reference week [and] the BLS has also clarified that furloughed and unpaid government workers will be included in the payroll counts (though contractor layoffs could weigh in some industries).”
Here’s a mildly interesting bit from the bank on the shutdown:
We estimate the unemployment rate increased one tenth to 4.0% in January, after rising 0.16pp to 3.86% in the December report. The furlough of nearly 400k federal workers (which the BLS plans to classify as unemployed on temporary layoff) could temporarily boost the unemployment rate by around ¼pp, but the impact is highly uncertain due to the self-reported nature of the household survey and its relatively smaller sample. As shown in the left panel of Exhibit 3, federal unemployment spiked during the 2013 government shutdown (and more so than the absolute increase in federal jobless claims at the time).
Credit Suisse notes that “unpaid government contractors could lead to some job losses, but this hasn’t had a clear impact on headline payroll numbers in past shutdowns.”
And without further ado, it is another blowout at 304k. December was revised sharply lower to 222k.
(Bloomberg)
Meanwhile, AHE ticked lower to 3.2% YoY and the MoM print cooled considerably to 0.1%, missing estimates of 0.3% by a wide margin.
(Bloomberg)
It looks like U6 had its highest jump since the crisis which presumably reflects the shutdown.
(Bloomberg)
On a first read, this looks like a Goldilocks report. Muted wage inflation with an extremely solid headline and a slightly higher unemployment rate.
Estimates and priors
- Change in Nonfarm Payrolls, est. 165,000, prior 312,000
- Change in Private Payrolls, est. 175,000, prior 301,000
- Change in Manufact. Payrolls, est. 19,000, prior 32,000
- Unemployment Rate, est. 3.9%, prior 3.9%
- Average Hourly Earnings MoM, est. 0.3%, prior 0.4%
- Average Hourly Earnings YoY, est. 3.2%, prior 3.2%
- Average Weekly Hours All Employees, est. 34.5, prior 34.5
- Labor Force Participation Rate, est. 63.0%, prior 63.1%
- Underemployment Rate, prior 7.6%
Actual
- U.S. Jan. Nonfarm Payrolls Rose 304k; Unemp. Rate at 4%
- Nonfarm payrolls forecast est. 165k, range -40k-230k from 75 economists surveyed
- Nonfarm payrolls in Dec. rose 222k
- Participation rate 63.2% vs prior 63.1%
- Avg. hourly earnings 0.1% m/m, est. 0.3%, prior 0.4%
- Y/y 3.2%, prior 3.3% est. 3.2%
- Nonfarm private payrolls rose 296k vs prior 206k; est. 175k, range 74k-224k from 31 economists surveyed
- Manufacturing payrolls rose 13k after rising 20k in the prior month; economists estimated 19k, range 10k to 25k from 19 economists surveyed
- Unemployment rate 4% vs prior 3.9%; est. 3.9%, range 3.7%-4.1% from 74 economists surveyed
- Underemployment rate 8.1% vs prior 7.6%
- Change in household employment -251k vs prior 142k
