MBS Live Day Ahead: Still Waiting on Some Data, But FOMC and Jobs Will Carry Weight

By: Matthew Graham •

The mighty Employment Situation (the big jobs report that gives us nonfarm payrolls, unemployment rate, avg hourly earnings, etc) is the king of all economic data in terms of market movement potential.  It doesn't always make waves, but if we could only bet on one report making the biggest, most frequent waves on average for years and years into the future, this would be it.  As such, it's a good thing that the report was never affected by the shutdown (the Labor Dept had its funding approved).

If the jobs report is the star of the show, there are several key supporting actors that HAVE been affected by the shutdown--reports like Durable Goods, Retail Sales, GDP, New Home Sales, and Incomes/Outlays.  At the start of this week, we still don't know when we're going to see these reports (don't trust any economic calendar you see, because in many cases, they're automated based on an underlying data feed that is receiving default data with inaccurate rescheduled dates).  

While the absence of those supporting actors will affect investors' ability to trade the bigger picture, the two most important events are going to happen on schedule.  The first of these will be Wednesday's FOMC announcement and press conference.  While the Fed will not be raising rates at this meeting, the text of the announcement provides an opportunity for the tone to shift away from the "steady as she goes" rate hike mentality to something that could give an official indication that the rate hike trajectory is "leveling off."   This will also be the first January announcement followed by a Powell press conference, marking the start of an era where the same will occur after every announcement (as opposed to the "every other announcement" convention that began under Bernanke).

Then on Friday, the jobs report is expected to show NFP (nonfarm payrolls) dropped from 312k previously to 166k in the month of January.  Much of that huge gap is explained by analysts assumptions regarding government contractors who haven't received pay during the shutdown.  Notably, however, any non-contracted federal employee--even those who are 100% furloughed and "non-essential"--are still counted in the NFP number.  The Bureau of Labor Statistics has a few helpful bullet points on its site to remind us how things work:

  • Federal government employees who are working, but who will not be paid until funding is available, are included in employment counts.
  • Furloughed federal employees who were not working during the reference period, but who will be paid once funding is available, are also included in employment counts.
  • On Wednesday January 16, 2019, the Government Employee Fair Treatment Act of 2019 was signed into law. The law requires employees of the federal government who are furloughed or required to work during the lapse in appropriations beginning on December 22, 2018, to be compensated for the period of the lapse. Because these employees will receive pay for the reference period, they will be counted as employed.
  • Beyond federal government employees, any worker who did not work or receive pay for the entire pay period will not be included in the employment counts.
  • Average weekly hours for the private sector employees may be impacted if employees’ work schedules are changed as a result of the lapse of appropriation.

I wish I could tell you I believed all the economists out there are/were aware of these details before submitting their NFP estimates to data aggregators, but sadly, I doubt that's the case.  No one at Econoday/Bloomberg/Reuters/Etc is checking the IQs or vetting the attention-to-detail of economic forecasters.  That's not usually a problem, because it's normally "business as usual."  It probably won't be a problem this time around either, since we're dealing with MEDIAN estimates as opposed to averages.  But even then, the implications for bonds are still slightly negative due to the simple fact that the average investor will be more willing to take any NFP weakness with a grain of salt this week.