- Strong U.S. payroll report today would give the Fed a continued green light for its hawkish 2017 tightening plan
- U.S. consumer credit expected to rebound
- Congress recesses today for two weeks and then faces a possible government shutdown shortly after returning
- Geopolitical risks ramp up as U.S. launches missiles at Syria
Strong U.S. payroll report today would give the Fed a continued green light for its hawkish 2017 tightening plan — The market is expecting today’s March payroll report to show an increase of +180,000, falling back from Feb’s strong report of +235,000. Expectations for today’s report were bolstered by Wednesday’s news that March ADP jobs rose by +264,000, much stronger than market expectations of +195,000.
Even though the ADP report was strong, weather-related volatility could still depress today’s payroll figures. March payrolls may see some negative payback from a job-boost in February from unusually warm weather. In addition, winter storm Stella hit the Northeastern U.S. in mid-March during the payroll survey week, which could hurt the payroll figures somewhat. Nevertheless, Wednesday’s ADP report was strong across the board and did not show any payback from Feb’s warm weather since March ADP constructions jobs rose by another +49,000, adding to Feb’s +59,000.
Payroll growth showed weakness in Q4-2016 with average monthly growth of only +148,000, possibly caused by uncertainty about the Nov election. However, payroll growth in 2017 has so far been strong with increases of +238,000 in January and +235,000 in February. Another report today of more than +200,000 could actually start giving the Fed an inflation headache if there is a squeeze on wage growth.
U.S. wage growth has already improved substantially since the U.S. economy is now near full employment. Average hourly earnings rose by +2.8% y/y in Feb, just below the 8-year high of +2.9% y/y posted in Dec 2016. The consensus is for today’s March hourly earnings growth to dip slightly to +2.7% y/y from Feb’s +2.8%.
The market consensus is for today’s Mar unemployment rate to be unchanged at 4.7% following Feb’s -0.1 point decline to 4.7%. The Feb unemployment rate of 4.7% was only +0.2 points above the Fed’s projection for a 4.5% unemployment rate from late 2017 through 2019.
A strong payroll report today would keep the Fed on track with its current plan for two more rate hikes this year plus starting to reduce its balance sheet “later this year.” Q1 GDP growth was likely weak in the vicinity of +1.5%, but the Fed appears to be writing that off as the result of the same residual seasonal weakness that has been seen in recent years in the first quarter. In addition, Q1 GDP was likely undercut by late IRS tax refunds and unusually warm winter weather that depressed utility output.
U.S. consumer credit expected to rebound — The market consensus is for today’s Feb consumer credit report to show an increase of +$15.0 billion, rebounding from January’s unusually weak report of +$8.794 billion (+6.3% y/y). Today’s expected report of +$15.0 billion would be mildly below the 12-month trend average of +$18.6 billion. Looking at the category breakdown, growth in installment loans over the last year has slowed substantially while credit card loans growth has increased so that their respective growth rates are now fairly similar. Specifically, credit card growth in January was up +6.0% y/y while installment loan growth was up +6.4% y/y.
Congress recesses today for two weeks and then faces a possible government shutdown shortly after returning — The markets will be mostly free of Washington politicians for the next two weeks as Congress leaves town today for their 2-week Easter recess. However, when Congress returns, they will only have the last week of March to approve new spending authority to replace the continuing resolution that expires on April 28.
There is still a chance of a U.S. government shutdown after April 28 because some Democratic support will be necessary to push through a new budget bill. Speaker Ryan may not be able to get his Freedom Caucus on board with a spending bill and he may need some votes from House Democrats. In the Senate, Democrats will be able to filibuster the spending bill if it has any Republican policy riders that they consider to be poison pills.
However, the markets are not overly worried about a U.S. government shutdown because the odds for a shutdown are probably less than 50-50. The thinking in Washington is that Republicans and Democrats will cooperate on a spending bill because no one really wants a shutdown over the relatively minor matter of funding the government for the remainder of the fiscal year. Even if there is a U.S. government shutdown, it is likely to be brief and have little macroeconomic consequence. The much bigger fights will come with the 2018 budget bill due by Oct 1 and the need for a debt ceiling hike by October or November.
Geopolitical risks ramp up as U.S. launches missiles at Syria — The markets were already on edge about geopolitics with Chinese President Xi Jinping’s meeting with President Trump in Florida for their summit on Thursday and Friday. The markets are still waiting to see what happens with the Trump-Xi summit meeting and whether the Trump administration after the summit is planning to announce any trade actions against China or new sanctions (or more) against North Korea.
Then Thursday evening, the Trump administration launched Tomahawk missiles against a Syrian airfield in retaliation for the Assad government’s sarin gas attack on civilians. June E-mini S&Ps on Thursday night initially fell by about -0.4% on the news. The Trump administration’s quick decision to take military action means the markets will have to be even more on guard than usual for any events might cause sudden U.S. military attacks in the future..