The Market Today

European Politics Added to Markets’ Plate Alongside Trade Tensions, Hourly Earnings to Be the Focus in Friday’s Payroll Report

by Craig Dismuke, Dudley Carter


This Week’s Calendar – Focus Will be on Friday’s Nonfarm Payroll Report for February, Specifically Hourly Earnings Changes: Although there will be several interesting economic reports this week – namely today’s ISM Non-manufacturing PMI, tomorrow’s revisions to last week’s capital goods data in January’s factory orders report, and Wednesday’s ADP payroll projection and the Fed’s latest Beige Book – Friday’s nonfarm payroll report is expected to be the most impactful.


With regards to Friday’s payroll data, monthly payroll additions have continued to surprise to the upside of the Fed and other economists’ estimates based on how far the economy is into the current cycle. After January’s total tally of 200k new jobs, economists are expecting another strong 205k new jobs to have been created in February. As a result, it will likely require an abysmal hiring figure, a negative one even, for it to be the most talked about metric. Instead, with inflation front and center of investors’ minds, hourly earnings data, which sparked significant market turmoil in early February, should be the bigger focus. Economists expect hourly earnings grew 0.2% MoM which would bring the YoY rate back down to 2.8% YoY. The unemployment rate is also expected to drop to 4.0% which would be a new low since 2000. Because of its suspected leading relationship with stronger wages and inflation, this level could also grab the market’s attention.


As for what it means for the Fed, it would seemingly require a net payroll contraction and dismal earnings change, potentially combined with deterioration in several other key metrics, to distract them from moving rates up in March. Given the recent strength in the labor indicators, this would appear to be somewhat of a tail-risk.


Today’s Calendar – ISM Non-manufacturing Report Expected to Show Continued Strength: At 9 a.m. CT, the ISM’s Non-manufacturing index is expected to pull back to a still-strong 59.0 (fourth best of the cycle) from January’s cycle peak of 59.9. It’s sister report covering manufacturing activity hit an almost 14-year high last week.



Overnight – European Elections Results in Likely German Coalition, Growing Uncertainty in Italy: In addition to enduring concerns around growing trade tensions and tougher talk between leaders of the U.S. and key trading partners, European politics were in focus for investors as this week’s global trading session got under way. The SPD party in Germany voted on Sunday in favor of forming a coalition government with current Chancellor Merkel which should remove a bit of uncertainty from her fourth term as chancellor. In Italy, a hung parliament was the result of Sunday’s election that saw the anti-establishment, Euroskeptic Five Start Movement take more votes (roughly 31% based on preliminary results) than any other single party. However, a centre-right bloc of parties received a larger (roughly 37%) combined shared. The lack of a majority will leave lingering uncertainty as parties try to negotiate common ground to form a coalition. The Euro is hardly changed but Italian stocks have sold off and spreads on its debts have widened. Outside of Italy, reaction was more muted with European stocks stronger and yields only modestly lower. Earlier, U.S. equity futures were mixed and the Treasury curve had made an almost 2 bps parallel shift down.



ICYMI – March 2, 2018 Weekly Market Recap: Though there was little net change in the Treasury curve week-over-week, yields were pushed and pulled about by an extremely busy week of economic and political events. There was a slew of economic reports but none really moved the market’s needle. Growth in 4Q17 was little changed after first revisions, down 0.1% to 2.5%. New and pending home sales wrapped up a weak month for the housing data. Personal incomes got a boost from tax reform but spending was weaker. Initial jobless claims dropped to 210k, their lowest level since 1969. Core PCE inflation held at 1.5% YoY. Business spending indicators were mixed; hard spending data disappointed but the ISM Manufacturing PMI hit an almost 14-year high. Of the several Fedspeakers, Fed Chair Powell’s first appearance before Congress was what got the market’s attention and caused Fed Funds futures to price in 100% chance of three 2018 hikes for the first time. Powell described an upbeat outlook for the economy and indicated it could affect his projections update at the March meeting. That sent stocks sliding, a trend that was exacerbated by a call from President Trump for tariffs on imported steel and aluminum. For the week, the 10-year yield fell 0.2 bps and the S&P 500 dropped 1.9%. Click here to see the full recap.

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