The Week Ahead: Employment Report in Focus

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Economists expect the week ahead to remind investors that “slow, plodding growth is still the mantra for the U.S. economy,” according to IHS Global Insight. 

The dominant headline this week will be Friday’s jobs report for September, which is expected to show growth in the private sector was offset by government sector lay-offs owing to temporary Census jobs. 

Other keys indexes this week such as the ISM services report and the ADP employment report will serve as preludes.

Key Events This Week:

Monday

10:00 ― Factory Orders are seen falling 0.4% in August following 0.1% expansion in July. The modest uptick recorded in July followed two months of declines in May and June.

10:00 ― The Pending Home Sales Index for August should give a better sense of whether home sales have bottomed out following the recent volatility resulting from the first-time homebuyers tax-credit. In July the index beat expectations by rising 5.2%, following a 2.8% decline in June. Over the prior 12 months, pending sales are down about a fifth.

A consensus of predictions was not available and forecasts were scarce, but economists at Deutsche Bank said to look for a 4% increase “as the hangover from expiring tax credits begins to wane.”

10:00 ― Federal Reserve Bank of New York Executive Vice President Brian Sack speaks before the CFA Institute Conference, "Fixed Income Management 2010," Audience Q&A expected.

2:00 ― President Barack Obama and former Federal Reserve chairman Paul Volcker attend an economic panel at the White House. 

3:00 ― Fed Chairman Ben Bernanke participates in a discussion with college students at the Rhode Island convention center. Audience Q&A expected.

7:30 Federal Reserve Chairman Ben Bernanke speaks on "Fiscal Sustainability and Fiscal Rules" before the Rhode Island Public Expenditure Council Annual Dinner.  No Q&A.

Tuesday:

10:00 ― The ISM Non-Manufacturing Index is anticipated to rise half a point in September to 52.0, just two points above the break-even level. This index, which tracks the construction, financial, and services sectors, has been slowing for several months, including a 2.8-point drop in August.

“We think the index is consistent with about 1.5% annualized GDP growth,” said economists at Nomura Global Economics. “Our forecast for September is 51.8. Given that we think this is roughly the current trend in GDP growth, we expect the non-manufacturing ISM to stabilize around its current levels.”

Analysts at IHS Global Insight were optimistic, predicting a bounce to 53.5 “as freight volumes have picked up in the past few weeks from a summer lull.”

They added: “The employment index should also move up to just below 50.0. Overall, a modest improvement in September - but nothing to get excited about.”

Federal Reserve Treasury Coupon Purchases: The Fed buys coupons in the 6 to 10 year sector. Of the $36.8 billion spent so far in the MBS prepayment reinvestment program, $12.2 billion has been allocated to the 6-10 year sector. On September 20, the Fed reinvesteed $5.2 billion into these maturities.

Wednesday:

7:00 ― MBA Mortgage Applications fell 0.8% in the week ending September 24 even as the average rate for a 30-year mortgage decreased to just 4.38%. Refinances are generally high but have fallen in each of the past four weeks, while purchases remain low but advanced 2.4%.

“The index for refinance applications has trended lower since the second week of September, suggesting that the number of people that are eligible for refinancing at the current low mortgage rate and have not done so yet is getting smaller,” said economists at Nomura. “Against the backdrop of the weakness in the refinancing activity, the mortgage application index is likely to fall further.”  

8:15 ― The ADP Employment Report, used as a tool to predict Friday’s nonfarm payrolls report, is expected to report a slight uptick in private jobs for September. In August the report suggested that 10k private jobs would be lost, while in the official BLS numbers the number was +67k. That continued a trend of undershooting the BLS numbers, which has limited the usefulness of the report.

Economists at Nomura look for a 10k increase in this report. “Considering the persistent difference in monthly changes in employment between ADP and the official BLS report, a 10k increase in ADP report is consistent with an advance of around 80k in official private employment.”    

Thursday:

8:30 ― Initial Jobless Claims are anticipated to fall by 3k to 450k in the week ending Oct. 2, after the prior week saw claims decline 16k. The expected decline comes closer to pointing towards net job growth at the national level, though the data won’t be free from distortions until Census jobs exit the data.

“The level of initial jobless claims is averaging not far above the 450K mark that would indicate a neutral labor market, but the fact that it has come down in September simply reflects the fact that there are less census worker layoffs and that overall payrolls are getting closer to posting a positive figure,” said economists at BTMU. “We think October, which is the first month without census worker layoffs, will be the first month to show an overall gain in jobs.”

11:00 ― Treasury announces the terms of auctions to be held in the following week. Issuance will included 3 year notes, 10 years notes, and 30 year bonds.

3:00 ― Outstanding Consumer Credit is expected to decline by $4 billion in August, which suggests either that banks aren’t enthused about lending or that consumers aren’t thrilled about borrowing ― probably both. The index has been declining for the past six months, including by $4.6 billion over the last two months. 

Economists at BBVA believe outstanding credit will disappoint markets and get slashed by more than $7 billion, representing an annual decline of 3.2%.

“The drumbeat of disappointing macroeconomic indicators caused trepidation in consumers, who in August increased their holdings of precautionary transactions deposits at banks,” they wrote. “Commercial banks will display an unexpected month over month decline in consumer credit after having increased consumer credit slightly between June and July.”

1:20 ―Federal Reserve Bank of Dallas President Richard Fisher speaks on "Current Economic Conditions" before the Economic Club of Minnesota October Luncheon. Audience Q&A expected. Media Q&A TBD.

Federal Reserve Treasury Coupon Purchases: The Fed buys coupons in the 3 to 4 year sector. Expect purchases to total between $2 and $2.4 billion

Friday:

8:30 ― Markets will be gearing up for the September Nonfarm Payrolls report all week long. Economists polled by Reuters currently believe the report will show the labor market was flat last month after 54k jobs were lost in August. Private employment is expected to have increased by more than 80k in the month, but that increase was offset by the expiration of temporary Census jobs.

“The labor market evidence continues to point to job creation, but at a slow pace,” said economists at IHS Global Insight. “We expect headline employment to fall 5,000, as more than 70,000 temporary Census workers were released in September. This is the last time that Census layoffs will distort headline employment, because only 6,000 temporary Census workers remained in place as of mid-September.”

Economists at Deutsche Bank point out that the report takes on added significance because it is the last jobs report the Fed will see before its November 2-3 FOMC meeting, when further quantitative easing initiatives are expected.

The Unemployment Rate, currently at 9.6%, is expected to remain put or rise by one-tenth.

“We forecast that the unemployment rate rose to 9.7% during the month from 9.6% previously,” said economists at Nomura. “Our call reflects both our expectations for weak job growth and also a forecast of healthy labor force gains.”

Also, the BLS will release an estimate for annual benchmark revisions to the prior year of data. 

“Last year at this time the BLS announced a tentative 824k downward revision to the level of March 2009 payrolls, the biggest ever,” Deutsche Bank noted. “The fact the economy has been growing over the past four quarters — it grew 3.7% in Q1 2010 — suggests to us the preliminary benchmark revisions announced by the BLS next week will be positive.”

10:00 ― The Wholesale Trade report last indicated that inventories grew by 1.3% in July and 0.3% in June, marking the sixth and seventh consecutive months of growth. The index is expected to continue growing in August, suggesting upside risks to third-quarter growth.

1:25 ―Federal Reserve Board Governor Daniel Tarullo speaks on "Next Steps in International Financial Regulation" before the Bretton Woods Committee International Council  Meeting. Audience Q&A expected.

ALERT: Also of note, Friday is Class A Notification Day in the TBA MBS Market.