Predicting the monthly payroll changes is a very dicey affair, as even tiny misses in the overall level of employment can be very unforgiving to forecasters. Job forecasting had been rendered even more difficult over the past few years due to changes in the methodology used by the Bureau of Labor Statistics in its monthly calculation.

It is much easier forecasting trends in payrolls, which are easier to spot because of the variety of economic indicators available.

The weekly data on initial jobless claims tend to correlate quite well with the monthly employment data, for instance. And the various consumer confidence data, the employment component of the Institute for Supply Management's (ISM) monthly survey of purchasing managers, the overall pace of consumer spending, surveys of small businesses and surveys of temporary employment firms, among other indicators, are also helpful. The various oddities associated with adjustments for seasonal trends are also useful, as is having some sense for how the weather might have affected the job tally during a particular month.

On those occasions when forecasting the monthly payroll change is difficult, it is better to think about the various market responses that could occur -- both the knee-jerk response and the lasting response. This might be the best way to play the March employment data. The consensus is for a payroll gain of 190,000, an unemployment rate of4.8% and for wages to gain 0.3%.

Possible Trading Scenarios

Moving to the possible market response, an as-expected reading would be bearish for bonds and bullish for equities, at least in the short run.

It's bearish for bonds because the bond market would have to continue its march toward 5%, as an as-expected gain would be sufficient to solidify expectations for a 5% funds rate. It's bullish for stocks because, despite deterioration in bonds, any bond drop would be seen as recent declines have been: adjustments to the reality of a new funds rate but not the start of a sharp upward climb. Any bond market weakness must be put in the context of expectations for solid earnings figures, so the weakness must be significant in order to matter.

A stronger-than-expected gain in payrolls could spur more-significant weakness in bonds and hence hurt the equity market, although it would depend upon the size of the payroll gain. A gain that is only marginally stronger than expected shouldn't have a lasting negative effect on stocks, especially in the context of earnings expectations, although a very strong payroll gain that raises the possibility of either a 5.25% or 5.50% funds rate would likely have a more lasting effect.

If payrolls are marginally weaker than expected, say around 150,000 or a bit less, the bond and stock markets would cheer.

The data would be pieced together with the slow pace of chain-store sales, weaker-than-expected car sales, the decline in home sales and the weaker-than-expected ISM index to produce a consensus for an end to rate hikes. There is probably a school of thought that believes a number like that might hurt equities because of what it suggests about a slowdown, but the dominant factor would probably be its implications for an end to rate hikes.

There would no doubt be a knee-jerk movement upward in equities, but it seems that many would be looking for a short-term gain on such a premise, which would probably cause selling after a pop higher. There would then be a buying opportunity to trade what would likely be a more lasting rally built on the premise of an end to rate hikes.

Watch the Wages

Wages have been gaining at a faster pace of late, with the year-over-year gain at 3.5%, the most in 4 1/2 years and above the 15-year average of 3.1%. Given the importance of wages to the inflation outlook, the wage figure will act as either a modifier or amplifier to the market response.

All that said, most of the employment indicators are pointing to continued strength in labor demand in March. Jobless claims, for example, continue to hover around 300,000, a level normally associated with job gains of near 200,000 per month. Importantly, the 300,000 in claims today looks much lower when considering the fact that 300,000 was considered a very low reading 10 years ago when the population was more than 10% lower than it is today. In other words, today's 300,000 was yesterday's 270,000.

The weekly jobless claims data contain a tally on continuing claims, which measure the number of people continuing to receive jobless benefits. In data released Thursday, this tally fell to a five-year low of 2.44 million, likely because benefit receivers found jobs.

Another reliable indicator of the employment situation is the Conference Board's (CB) monthly consumer confidence index. The index is based on five questions, two of which relate specifically to the job market. It is noteworthy, then, that the CB's index reached a four-year high in March.

Friday's employment data will get a boost from a seasonal factor, which is meant to account for the ups and downs in the number of businesses created throughout the year.

March through June are the months that tend to see the greatest number of net business formations, and the Bureau of Labor Statistics "plugs in" jobs expected to be associated with these new businesses without actually knowing whether or not they were added. The BLS has actually done a fairly good job of accurately predicting the number of monthly job changes that have occurred as a result of the fluctuations in net business formation, as evidenced by the relatively small number of benchmark revisions seen to the yearly data in recent years.

Nevertheless, there seems to be some intrayear volatility associated with the plug factor, and Friday's jobs data will be helped by the factor even if the job market worsened during the month. By the way, the impact from this plug factor is at its greatest in April, when over 200,000 jobs are "added" to the tally owing to high levels of business formation, and it is at its lowest in January, when the factor actually "subtracts" from the job tally.

Weak chain-store sales and the cold weather that was experienced before the end of the survey period on March 18 present downside risks to the data. It is these kinds of things that make the month-to-month forecasts difficult.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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