Brace For Volatility: Powell Testimony And Jobs Report Coming This Week

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Brace For Volatility: Powell Testimony And Jobs Report Coming This Week

Seeking Alpha2023-03-06

SummaryIt will be another week of economic data.Additionally, Jay Powell will be speaking in front of Congress.Powell is likely to stay data dependent.However, that data is likely to suggest more rate...

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Last week's ISM survey pointed to continued economic strengthening in the US, while the European inflation data indicated that inflation rates are still undesirably high worldwide.The importance of every data point can be seen in the implied volatility curve of the S&P 500. There is a saw-tooth movement in the implied volatility curve with spikes around the jobs report on March 10, the CPI on March 14, and the FOMC meeting on March 22.At least based on the implied volatility curve, the market seems to fear the jobs report this week much more than Jay Powell speaking on Tuesday and Wednesday in front of Congress.BloombergSigns Point To More Strong Job GainsJob growth is expected to be strong again in February. Current estimates are for non-farm payroll to have increased by 215,000, less than January but still a very healthy growth rate. This indicates that the Fed still has much more work to do to bring the labor market back into balance.Last month's job report showed an increase of 517,000, much higher than the estimated 189,000. The services ISM data confirms that the January job data was probably not a fluke. The ISM services employment component showed substantial job gains in February, with the services employment index rising to 54 from 50.The ISM services employment survey appears to trail the non-farm payroll net gains by one month. So while the ISM services survey didn't show significant job gains in January, those significant job gains did show in February. Based on this, it doesn't seem likely to see downward revisions to the January data.BloombergAdditionally, the Homebase Hourly Employees Working also showed gains in January, which also supports the substantial improvements in the employment report, and that strong job gains are likely to continue in February. The Homebase data appears to lead the BLS job report by around one month.BloombergThe Unemployment Rate is Likely To Remain Very LowMeanwhile, unemployment claims have steadily fallen in recent weeks, suggesting that the number of unemployed workers is likely to remain low and that the overall unemployment rate is expected to show little change in February. Estimates are for the unemployment rate to remain unchanged at 3.4% in February.BloombergWages May Rise FasterAverage hourly earnings are expected to increase in February to 4.7% from 4.4% in January. The Atlanta Fed wage growth tracker and the ADP annual pay for job stayers are tracking above the BLS job report wage growth reading over the last several months. But what seems most important here isn't the rate of change but the trend. The trend for the Atlanta Fed and the ADP wage growth suggests a flattening wage growth, not the deceleration witnessed in the BLS average hourly earnings growth. This also indicates that there may be upward pressures on wages in February and possibly even upward revisions when the job report comes out on Friday.BloombergJOLTS Have Been Hard To PredictMeanwhile, JOLTS data, which comes out on Wednesday, is expected to fall to 10.5 million in February from 11.0 million in January. The JOLTS data has been impossible for analysts to predict in recent months. Analysts have consistently underestimated the JOLTS data, which could suggest that the JOLTS data again comes in hotter than expected.BloombergAnalysts may be looking for softer job openings data because the Indeed Job Posting data has fallen dramatically since the beginning of the year. The Indeed Job Posting data has tracked changes in JOLTS data reasonably well over time. More recently, there has been a significant divergence between the two data sets.Mott Capital/Indeed/BloombergPowell To Stay Data DependentThe data suggests that the job market remained hot in February and that wage pressures will not likely subside anytime soon. This will pressure the Fed to try and cool the demand side of the economy, and this type of talk should continue when Jay Powell speaks in front of Congress this week.The market now sees many more rate hikes coming from the Fed. Just on Thursday, Fed board member Christopher Wallernotedthat rates might need to exceed the target of 5.1% to 5.4% in the December summary of economic projection. Given the data, Powell will likely reflect similarly, noting that rates may need to go somewhat higher than expected.The market now sees the terminal rate hitting 5.45% by October and a rate of 5.35% in December. The market has completely removed the odds of a rate cut in 2023. The changes in market perception around rates have changed dramatically over the last month when it saw a terminal rate of just 5.1% by July.BloombergPowell isn't likely to try and back himself into a corner and will likely keep the market guessing by remaining in that data-dependent mode. However, given the data, more rate hikes will be needed.If the data this week does show that wage pressures are not abating, that the unemployment rate is historically low, and the US economy is still adding jobs at a very healthy clip, along with all of the recent hotter-than-expected inflation data we have received, it is going to be very hard for the Fed not to keep raising rates.It seems to be more of a question of how high those rates have to go. But the longer the data stays hot, the more likely it is that rates on the long end of the curve will continue to rise and do the heavy lifting for the Fed, hopefully making the Fed's job easier.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":true,"newsSizeData":{"likeSize":434,"commentSize":23,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}