NEW YORK (Real Money) -- While no one expects the Federal Reserve to hike interest rates during its June 17 meeting, this week's data will go a long way in shaping Fed policy and thus the bond market action for the next couple months.
Obviously, the big release will be Friday's job report. Bloomberg's survey is calling for gains of 227,000. Guessing any one month's figure is a fool's game, but I think the market is set up for the number to be a little low. In other words, a 50,000 miss to the downside would not result in a huge rally, but a 50,000 beat would result in a significant selloff. A 275,000 figure would shift the market view from "first-quarter weakness wasn't just about weather" to "Looks like we are going to repeat last summer's job gains."
I say this because of where such a change would put the trajectory of unemployment. Right now, the market has priced in a 30% chance of a September hike and an almost 100% chance of a hike by December. Say the actual job gain figure is a 50,000 miss (i.e., 177,000), and we keep gaining at that level through year-end. By the end of 2015, Unemployment would be 5.15%, which is still very close to the Fed's estimation of full employment (estimated at between 5.2% and 5.0%). Under that scenario, I still think the Fed is highly likely to hike in December.
Now let's say there is a 50,000 beat (+277,000) and job gains continue at that level. In that case, unemployment would be at an estimated 4.9% in September and 4.6% in December. If that played out, I'd have to consider the possibility of two hikes in 2015, which currently isn't priced in at all.