"If workmen are denied any increase in real wages and they can look forward only to a better standard of living through reduction of prices, progress for them is terribly slow, and they become impatient and dissatisfied." -- Charles E. Wilson
This Jobs Report Is Still Important
Just how important is the BLS February Employment Report? I mean markets are projecting a quarter of a point rate hike on Wednesday regardless of what transpires this morning. In fact, if my math is good (don't count on it), both equity and debt markets are pricing in an increase of about 3/8 of a full percentage point in the fed funds rate for next week. What that means is that professionals are assuming a March hike and legging into a June hike. That's where this morning's data come into play.
A poor headline number today for nonfarm payrolls, or an utter lack of wage growth, would rob the FOMC of the freedom to be aggressive in the official statement on Wednesday. Call it a mandate if you must, but I think it's quite obvious that the thinking of the Fed has become much more aggressive this year. The tone of Janet Yellen's press conference could also change with a sketchy series of numbers today. The only item that might almost survive fully intact would be the economic projections made by the Fed in aggregate back in December, as the central tendency of that data was actually quite pedestrian at the time.
If you go back and look at those most recent projections for full year 2017, improvements expected for GDP, inflation and unemployment are all incrementally minor, yet the increase in the fed funds rate is dramatic. In fact, if you go out as far as 2019, nothing really improves all that much across the broad U.S. economy, yet the fed funds rate ends up around 3%. Now, that's food for thought. If they expected a stagnant economy, then why raise interest rates consistently for three years? The only survivors in that scenario would be the banks. Who are the Fed's shareholders, again?
Risk and Reward in Oil
What story is just as big, if not bigger than the employment situation right now, and even bigger than the Fed for the moment? Health care, right? Wrong! We're still talking about oil's precipitous drop over the last two days, and the simultaneous backyard beat-down handed to the energy sector from Wednesday through yesterday afternoon. You might have noticed the late-day short covering that painted a rosier picture on oil stocks as Thursday's equity markets moved into the closing bell, but the risk is evident.
What happens next for the underlying commodity and the broader sector will have a lot to do with production levels, fundamentally, and the behavior in the immediate of the "long and wrong" crowd. After trading within a narrow range for a couple of months, the long trade in the space had become very crowded. Undoubtedly, the downward spasm toward $48 a barrel early yesterday was caused both by the election of stop orders and automated risk management procedures.
Now, with the humans back in charge, the short-term range seems to have a $49 bottom, but all you would need would be a little fear -- let's say a rig count number on a Friday afternoon -- to cause a rush to the exits that would retest yesterday's lows. I still see $46 as the medium-term area for significant support. If you read my notes, or follow me on the tube, then you know that I started getting long the space yesterday, so I do have skin in the game. I think that at least for now, the sector carries less risk than the actual commodity if you stick to quality. You may want to speculate, which I do in spots, but understand exactly what percentage of your energy portfolio is so exposed, and write it off for the time being. You may even want to segregate your spec plays onto a different blotter. I find that helps maintain focus.
When You're Right... Douglas Borthwick
Recently, I was part of a roundtable discussion hosted by Jim Cramer. The other pros involved were Douglas Borthwick, Peter Tchir, and Daid Yoe Williams. We discussed how to play the markets in March.
Douglas (who makes a lot of correct calls, btw) mentioned in that discussion that he thought the U.S. government might try to weaken the dollar via a "Plaza Accord 2.0". Cramer, at the time, noted that this was an out-of-consensus opinion. Douglas pointed out yesterday that this opinion was becoming "more consensus", with William Pesek (Barron's Asia) writing an op-edsuggesting just that, and Reuters publishing a story detailing thewording of the G20 statement for March 17-18, where it is likely the table will be set for a Plaza Accord type of machination in FX. I don't know if Douglas will tell you, but I will. You heard it from him first, and you heard it at The Street.
February Employment Situation - 08:30 ET
Non-Farm Payrolls:Expecting 190,000, January 227,000. Most months, job creation is the headline item. The 190,000 expectation seems to still be the official consensus, but after that blowout ADP print, any pressure is thought to be to the upside. The two smartest guys I spoke to on this both raised their guidance on this number to between 210,000 and 230,000. Keep in mind that this is the first jobs report that President Trump may call his own. If it's positive, be near Twitter.
Average Hourly Earnings:Expecting 0.3%, January 0.1% m/m. Wage growth is, at worst, the second most important component of the jobs report. We've seen two very weak months in the last three as far as wages are concerned. In fact, November was the last month that could even remotely be referred to as decent in this regard. A healthy month-over-month number is expected, and would be most welcome.
Average Workweek:Expecting 34.4, January 34.4 hours. This tertiary measure for demand for labor is expected to remain unchanged. Though 34.4 hours is the high of 2016/17, remember that the low of 2015 was 34.5 hours, with several months spent at 34.6, so there is slack in many corners of the labor market.
Participation Rate:Expecting 62.9%, January 62.9%. Though this rate of participation may look dreadful, with the exception of March 2016 this was the highest level of participation that we've seen since early 2014. That is also why the headline unemployment rate went up in January.
Unemployment Rate:Expecting 4.7%, January 4.8%. Most traders consider this item to be the least useful tool in the toolbox when it comes to assessing the health of the labor market. Due to the lack of overall participation, it is very difficult to arrive at an honest unemployment rate. One thing we do know is what is currently defined as a discouraged worker needs to change. An inclusion of the "discouraged" who want to work would drive this print at least a full percent higher. The BLS refers to that information as U-5. For those with an interest, Gallup's unemployment rate for the U.S., which is not seasonally adjusted, dropped in February to 5.6% from 5.8%.
Underemployment Rate:January 9.4%. This is the item that most folks outside of economics refer to as the "real unemployment rate", because it includes laborers who are working part-time, but would like to work full time. Like the headline rate, this number moved higher in January with the increase in participation. Gallup's U.S. underemployment rate for February dropped (as did their unemployment figure) from 14.1% to 13.9%. Again, Gallup does not adjust their data.
13:00 - Baker Hughes Rig Count (Weekly):Last week 756 total, 609 oil. This may possibly be the last upwardly mobile rig count that we see for a while. Given the performance of crude in the marketplace this week, I wonder how fast they can shut these things down. Natural gas has broken out its recent range, and is now trading at its highest price point in a month. That's where you may actually some growth in this release.
14:00 - Federal Budget Statement (February):Expecting $-135 billion, January $51.3 billion. At first glance, the expectation for February's monthly budget looks like a "big ugly", and let's face it, it is large, and it is ugly. The fact is that February is routinely the most expensive month of the year to run the U.S. government, and this is actually a light February as far as that goes. You would have to go back to 2008 to find a year that February ran a deficit of less than $-190 billion, and 2007 to find a year that February hit the tape at a smaller deficit than today's expectation.
Sarge's Trading Level
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2382, 2374, 2361, 2367, 2354, 2344
RUT: 1378, 1371, 1362, 1355, 1349, 1342
Friday's Earnings Highlights (Consensus EPS Expectations)
At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.