The Day Ahead: Non-Farm Payrolls, Unemployment Rate, Hourly Wages, Factory Orders
Interest rates moved mostly sideways in light overnight trading volumes. The same thing goes for stocks, totally sideways in a quiet marketplace.
Unfortunately sideways overnight price action in benchmark Treasuries followed an abrupt spike in rates yesterday that carried the 10-year note outside its recently tight trading range, back into the middle of the broader month long range at 3.57%. Short selling was obvious in the futures market, we'd like to see those positions squeezed out today to confirm the recovery rally that has played out over the past three weeks. The 2s/10s yield curve steepened slightly to 278bps wide in the sell-off and is currently holding that level.
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The 3.625% coupon bearing 10-year Treasury note is currently -7/32at 100-12 yielding 3.58% and the FNCL 4.5 MBS coupon is +1/32 at 101-09. MBS are outperforming out the gate. S&P futures are +1.75 at 1331.50. Dow futures are +15 at 12,254. The NYMEX Light Crude Oil futures contract is +0.88 at 102.79.
Key Events in the Day Ahead
8:30 - The February Employment Situation Report is the big ticket item on the data calendar. After three months of below expectations payroll growth, economists once again expect a healthy gain in the Establishment Survey side of the Employment Situation Report. Forecasters are calling for a 185,000 expansion in Non-Farm Payrolls. This would be the largest monthly improvement since April 2010. The other side of the report, the Household Survey, is anticipated to indicate a modest 0.1 percent jump in the Unemployment Rate from 9.0 percent to 9.1 percent.
REUTERS FACTORS TO WATCH
U.S. nonfarm payrolls probably soared in February after being held down by extreme winter weather that gripped large parts of the country in January. Employment is expected to have increased by 185,000, which would be the largest gain in almost a year and the clearest signal yet that a self-sustaining economic recovery is taking root.
But payrolls in recent months have tended to fall far short of economists' expectations, even though independent labor market surveys have largely pointed to momentum in the pace of job creation.
There are concerns that the government may be missing growth coming from new businesses. Labor Department chief economist Betsey Stevenson last month acknowledged the count was likely falling short, just as faulty estimates of how many companies were created or destroyed led to an understatement of job losses during the recession.
Factors in favor of a strong February payrolls figure include first-time applications for state unemployment benefits, which saw hefty declines during the month. In addition, consumer confidence surveys paint a picture of an improving labor market.
A survey of national factory activity on Tuesday showed a gauge of manufacturing employment scaled a 38-year high in February.
Though parts of the country such as the Midwest suffered severe snowstorms, conditions eased during the payrolls survey week.
Despite the expected jump in payrolls, the unemployment rate is seen ticking up to 9.1 percent. The jobless rate is derived from a separate survey of households, which in January showed a nearly 600,000 increase in jobs.
The unemployment rate has dropped 0.8 of a percentage point since November, the biggest two-month decline since 1958. It is being closely watched by the Federal Reserve for signs the economic recovery is on a self-sustaining path.
The path of unemployment could well determine the timing of the U.S. central bank's first interest rate hike since cutting overnight lending rates to near zero in December 2008. According to the Fed's projections, the economy's natural unemployment rate is between 5 percent and 6 percent.
Fed Chairman Ben Bernanke has said the central bank would need to start withdrawing some of its massive monetary stimulus before the jobless rate drops to that level. The Fed is expected to complete it's $600 billion government bond-buying program, which ends in June, even if employment shows strong gains in February and the months after.
As in previous months, the private sector is expected to account for all the anticipated job gains in February. Private payrolls likely jumped 190,000 after growing 50,000 in January, spurred largely by the services sector.
Private services payroll growth took a step back in January as employment for couriers and messengers declined sharply. Temporary hiring also dropped in January.
Employment in the goods-producing industries should see a weather related bounce, with construction recouping some of the 32,000 jobs lost in January. Strong gains are expected in manufacturing, a sector that is powering the recovery.
Government payrolls probably contracted for a fourth straight month, pulled down by state and local governments, which are under heavy budgetary pressures.
The average work week is expected to edge up after severe weather shortened working hours. Average hourly earnings are expected to increase at a slower pace than in January.
MARKET IMPACT
Nonfarm payrolls will vie for investors' attention with Libya, where political unrest has pushed crude oil prices above $100 a barrel and ignited fears of inflation and slower growth. A stronger employment report, which would be fresh confirmation of a strengthening recovery, could trigger a government bond sell-off and push yields up. It would also be a boost for the dollar and stocks, which have suffered on concerns that the high oil prices could hobble the recovery.
10:00 - Factory goods orders for January will also be reported, and are expected to rise by 2.0 percent, compared to 0.2 percent the month before. This would be the third consecutive rise but the breakdown should be mixed and consistent with a gradual uptrend. Forecasts by 61 economists polled by Reuters varied widely, from 0.2 percent to 4.0 percent
10:00 -Federal Reserve Vice Chair Janet Yellen participates in "Improving the International Monetary and Financial System" panel before the International Symposium of the Banque de France. Audience Q&A expected.
10:15 - The Federal Reserve will purchase an estimated $1-2 billion Treasury Inflation Protected Securities maturing between 04/15/2013 – 02/15/2041