Career Day Ahead: Investors Brace for Friday's Critical Jobs Data Following Powell's Hawkish Remarks

(Thursday market open) Just over a month ago, the Labor Department kicked off February with a jobs report that shocked market participants, unnerved the Federal Reserve, and sparked a rally in Treasury yields that continues to slam the brakes on Wall Street gains.

We’re about to come full circle ahead of February’s Nonfarm Payrolls report from the government, due at 8:30 a.m. ET Friday. If job gains look anything like January’s massive 517,000, it’ll likely add to the burden on stocks and bonds as investors worry about the Fed hiking rates more substantially at its next meeting. Major indexes slipped overnight and the 10-year Treasury yield rose.

We know the Fed’s watching tomorrow’s jobs report and next week’s inflation data closely, because that’s what Fed Chairman Jerome Powell testified on Capitol Hill this week. His willingness to raise rates higher for longer if data keep sizzling splashed cold water on the recent rally and sent rate-sensitive, short-term Treasury yields to nearly 16-year highs. Most major indexes recovered a bit yesterday despite dollar and yield strength.

Trading could be choppy and lack direction today ahead of the data, which analysts expect to show much slower growth of around 200,000 positions (see more below). However, that was also approximately the average estimate going into last month’s report and look what happened.

Just in

Initial jobless claims: Weekly initial jobless claims totaled 211,000, up from 190,000 a week earlier and above expectations. Continuing claims also rose, suggesting people may be taking longer to find new jobs. It’s just one week’s data, but this is the type of report the Fed is likely seeking for indications of a slowing economy. In addition, the report did have the potential to upset the market if the initial claims number had been low again.

China update: After China’s conservative growth forecast from last weekend, the country’s inflation data overnight pointed toward continued sluggish economic conditions. Consumer prices rose 1% year-over-year in February from 2.5% in January and dropped 0.5% month over month. Analysts had expected a slight month-over-month gain. Consumers apparently stayed cautious despite the lifting of zero-COVID restrictions, Trading Economics reported.

Morning rush

• The 10-year Treasury note yield (TNX) climbed back above 4%, trading exactly at that level.
• The U.S. Dollar Index ($DXY) slipped to 105.43 but remains near its 2023 highs.
• The Cboe Volatility Index® (VIX) futures inched up to 19.55 after VIX briefly touched 20 yesterday.
• WTI Crude Oil (/CL) rose slightly to $76.67 per barrel.

The 2-year Treasury yield eased slightly early Thursday but remained near recent highs above 5%.

Eye on the Fed

The key takeaway from Fed Chairman Jerome Powell’s second day of congressional testimony was that the Fed hasn’t made up its mind about this month’s rate move. Powell’s “faster pace” language to the Senate Banking Committee Tuesday likely accounted for much of that day’s market sell-off. Wall Street took his comments as indicating more likelihood of a 50-basis-point rate hike at the next FOMC meeting when the market had previously baked in a quarter-point.

“We have not made any decision about the March meeting,” Powell told the House Financial Services Committee on Wednesday, Bloomberg reported. “If—and I stress that no decision has been made on this—but if the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes,” he said.

Powell’s remarks didn’t appear to convince market participants that minds weren’t made up about 50 basis points. The probability of that happening at the March 21–22 FOMC meeting climbed to nearly 80% late Wednesday, according to the CME FedWatch Tool. We’ll see if that changes over the next two weeks as data filter in. Historically, when trading indicates this high a likelihood this close to a meeting, it usually proves correct.

What Powell appeared to be trying to get across is that the Federal Open Market Committee (FOMC) won’t reflexively accelerate the pace of rate hikes and isn’t on autopilot in regard to rate policy.

What to Watch

Jobs preview: Analysts’ predictions for Friday’s jobs report, according to research firm Briefing.com:

• Nonfarm payrolls: Up 205,000, well below January’s 517,000.
• Average hourly earnings: Up 0.3%, the same as January.
• Unemployment rate: 3.4%, the same as January.

Keep in mind: Even if jobs growth falls back to say, 250,000 to 300,000, investors may grow more convinced the Fed could hike rates 50 basis points rather than 25 when it gathers March 21-22. It would likely take a headline number of under 250,000 to ease minds a bit. Anything above that is historically on the strong side.

One metric to watch tomorrow is labor force participation, stuck at 62.4% the last two months and below pre-pandemic levels. Curiously, rising wages haven’t drawn more people back into the labor market, though certain structural changes associated with the pandemic may prevent a rebound. A higher labor force participation number might be interpreted as friendly for inflation, implying companies might not have to compete as hard for new hires by raising wages.

One more thing to monitor: Will the Labor Department downwardly revise that monster January headline of 517,000? The data caused head-scratching at the time, in part because it was so out of sync with November’s 290,000 and December’s 260,000. It was well above the 401,000-per-month average for all of 2022. Analysts had been expecting jobs growth to ease thanks in part to signs of a slowing economy late last year.  A downward revision to January’s number could be an Easter egg to look for tomorrow.

Stocks in Spotlight

Oracle (ORCL) is one of those info tech “barometer” stocks. Conditions at ORCL often provide insight beyond its walls because it touches so many aspects of global tech, especially the cloud. Its expected earnings this afternoon follow a string of solid tech earnings recently from Salesforce (CRM), Nvidia (NVDA), and Broadcom (AVGO). Last time out, ORCL called its FY Q2 ending November 30 an “outstanding” quarter, according to Barron’s, so the pressure is on for a repeat. The company at that time projected FY Q3 currency-adjusted growth of 21% to 23%, and cloud growth, including its acquisition of healthcare software company Cerner, of 46% to 50%, currency-adjusted.

Market minutes

Here’s how the major indexes performed Wednesday:

• The Dow Jones Industrial Average® ($DJI) fell 58 points, or 0.18%, to 32,798.
• The Nasdaq Composite® ($COMP) rose 0.4% to 11,576.
• The Russell 2000®(RUT) rose 0.04% to 1,879.
• The S&P 500® index (SPX) added 5 points, or 0.14% to 3,992.

Wednesday featured decent economic data but a disappointing 10-year Treasury auction. Most major indexes gained ground, but the poor results of the Treasury auction appeared to push Treasury yields higher and keep a lid on stock market gains.

For the second consecutive day, the SPX couldn’t close above its 50-day moving average (MA), now near 3,997. That may represent a resistance point, Briefing.com noted. If you’re looking for a positive takeaway, the SPX fell under its Tuesday low intraday but rebounded to close higher.

Sector-wise, energy remained under pressure as crude stumbled due to the rising dollar and chances of a larger rate increase. Leading sectors included info tech, utilities, and real estate, a bit of a motley crew without much in common. There’s not a major amount of conviction in the market right now, as it seems participants may be moving to the sidelines ahead of tomorrow’s report. Choppiness could mark today’s action, and retail investors appear to remain uneasy about market volatility and rising yields.

Extra, extra: Charles Schwab’s weekly outlook video hosted by Chief Global Investment Strategist Jeffrey Kleintop is a great resource for a 90-second look at what might shape the markets each week.

Talking Technicals: While fundamentals continue to drive daily trading, the SPX appears to be locked into a technical range for the moment, with 3,880 forming the downside and 4,100 forming the top. The fundamentals set the levels, so to speak, while the technicals set the range. Fundamentals will likely drive us back and forth in that range, most notably Fed policy and the coming jobs and inflation data.

Thinking cap

Ideas to mull as you trade or invest

Take this job… Before getting too optimistic about the lower number of “quits” in the January Job Openings and Labor Turnover Survey (JOLTS) report released Wednesday, let’s put the data into perspective. There were 2.5 million quits in January, the lowest since March 2021. If people think there’s easy opportunity to get a position elsewhere, the belief goes, they’re more likely to leave a job they dislike. When demand for workers decreases, typically the quit rate falls as well. Quits being down 500,000 from a peak of 3 million in November 2021 could show the Fed’s tighter policies having an impact. Only when you compare quits now to quits in pre-pandemic days does it become clear that employees continue to seek new opportunities at a very high rate. January’s quits outpaced quits from any month between January 2013 and February 2020. Seems like job mobility remains a real thing.

FOMC dissent brewing? It’ll be interesting to see if anyone at the FOMC diverges from a 50-basis-point rate hike later this month—if indeed that’s what’s decided. Fed voters have generally voted in lockstep over the last year as even so-called “doves” quickly joined forces with hawks. If anyone at the FOMC takes the dovish side on March 21–22, the argument could be that “higher rates sooner” risks recession. While the Fed doesn’t want people to lose their jobs if the economy slows, Powell appeared to suggest this week that he might be willing to accept higher unemployment than today’s near-record low level in return for slowing price growth. “Will working people be better off if we just walk away from our jobs and inflation remains 5, 6%?” Powell asked Sen. Elizabeth Warren (D-Mass.), in response to her question about possible job losses associated with higher rates.

Want slower growth? There are signs of the economic engine cooling. According to Xeneta and Sea-Intelligence, ocean carriers canceled more than six times the number of sailings from Asia to the U.S. West Coast ahead of the Chinese New Year than they did during the same time frame in 2019. In addition, ocean freight bookings have been declining since June 2022, down 40%, according to SONAR FreightWaves. Shipping volumes are down 50% since March 2022. Also, the New York Fed reported this week that global supply chains have returned to normal, with the lowest Global Supply Chain Pressure Index (GSCPI) since August 2019. This supply chain easing could imply growing room at port facilities and on container ships, a potentially anti-inflationary trend.

Calendar

March 10: February Nonfarm Payrolls

March 13: No major data or earnings

March 14: February Consumer Price Index (CPI) and Core CPI

March 15: February Retail Sales and February Producer Price Index (PPI).

March 16: February Housing Starts and Building Permits and expected earnings from Dollar General (DG).

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

Image sourced from Shutterstock

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