U.S. payroll growth expected to start 2018 on a solid note
Final-Jan U.S. consumer sentiment expected to be revised higher
Dec U.S. factory orders expected to show another strong report
U.S. government shutdown appears unlikely next week
U.S. payroll growth expected to start 2018 on a solid note — Today’s Jan unemployment report is expected to show a return to trend after hurricane and holiday distortions affected the series in the latter part of 2017. Payrolls in December showed a weak increase of +148,000 due to weaker retail job growth and due to some payback after strong post-hurricane job reports in Oct (+211,000) and Nov (+252,000).
The consensus is for today’s Jan payroll report to show an increase of +180,000, which would be mildly better than the 12-month trend average of +170,000. The markets will be watching to see if there is an improvement in job growth with the new tax-cut bill, which boosted corporate cash and should bolster investment and employment.
This past Wednesday’s Jan ADP report of +234,000 was supportive for today’s payroll report. The ADP report has shown job gains above +200,000 for the last four reporting months.
The consensus is for today’s Jan unemployment rate to be unchanged at 4.1% for what would be the fourth straight month. The current 4.1% unemployment rate is the lowest in 17 years and is already at the level that the FOMC is predicting for 2018 and 2019. It is possible that the unemployment rate will fall into the high 3% area if payroll growth remains strong near +200,000 in coming months.
Wage pressure has been modest thus far despite the tight unemployment rate. December’s average hourly earnings growth of +2.5% y/y was close the average seen in the past year and was -0.4 points below the 8-3/4 year high of 2.9% seen in Dec 2016. However, wage growth should pick up in January as higher minimum wage levels kicked in for a number of states and cities.
Specifically, today’s Jan average hourly wage report is expected to improve slightly to +2.6% y/y from Dec’s +2.5%. A stronger-than-expected hourly wage report today would feed market fears that the Fed will turn more hawkish if it starts to see the accelerating wage growth that it has been expecting for months.
Unless today’s payroll report is shockingly weak, the report is not likely to shift the market consensus for a rate hike at the next FOMC meeting on March 20-21. The FOMC at this week’s meeting left policy unchanged, as expected, following the +25 bp rate hike at the previous meeting in December. The market is discounting a 100% chance for a rate hike at the March meeting, which would be the first of the three rate hikes that the Fed is expecting for 2018.
Final-Jan U.S. consumer sentiment expected to be revised higher — The market consensus is for today’s final-Jan University of Michigan U.S. consumer sentiment index to be revised higher by +0.6 points to 95.0. That would leave the index down by -0.9 points from December instead of the preliminary-Jan decline of -1.5 points to 94.4.
U.S. consumer sentiment is due for some improvement since it has fallen for the last three months, despite the strong economy and the tax-cut bill passed in late December. Most U.S. consumers in early 2018 will have extra cash in their pockets from the tax cuts once the new withholding schedules take effect in February. Other reasons for strong consumer confidence include (1) the record highs in the stock market, (2) the strong economy, (3) the strong labor market and rising consumer incomes, and (4) rising home prices.
Factors curbing consumer confidence include (1) rising gasoline prices due to the OPEC production-cut agreement, (2) the likelihood that U.S. interest rates and mortgage rates will steadily rise this year as the Fed ratchets up its funds rate target, (3) Washington political strife, and (4) geopolitical risks such as North Korea.
Dec U.S. factory orders expected to show another strong report — The market consensus is for today’s Dec factory orders report to show another solid increase of +1.5%, adding to November’s strong report of +1.3% and +0.8% ex-transportation. Factory orders showed very strong year-on-year growth in November of +8.0% y/y (+7.6% ex-transportation), illustrating the bright picture for the U.S. manufacturing sector. Confidence is strong among manufacturing executives with the Jan ISM manufacturing index at 59.1 and the new-orders sub-index at 65.4.
U.S. government shutdown appears unlikely next week — There will be another U.S. government shutdown if Congress does not approve new spending authority by next Thursday (Feb 8) at midnight. However, a shutdown does not appear to be likely because Senate Democrats have already received the most they could expect when Senate Majority Leader McConnell promised in conjunction with the last shutdown that he would bring immigration legislation to the floor for a vote after February 8 if there was no prior resolution and no new government shutdown.
Meanwhile in the House, Speaker Ryan reportedly plans to bring a CR to the floor on Tuesday that contains spending authority until March 22 or 23. The Freedom Caucus is again threatening to vote against the CR but they are likely to relent in the end, thus allowing the CR to pass the House without support from Democrats.
Meanwhile, debt ceiling concerns are heating up. The CBO earlier this week moved up its X-date to the first half of March from its previous estimate of late-March to early-April. Republican Congressional leaders have yet to announce how they plan to get a debt ceiling hike passed in time to avoid the threat of a Treasury default.