"It Can Only Disappoint" - What Wall Street Expects From Friday's Payrolls Report

Following Wednesday's blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow's nonfarm payroll report, the last major economic data point before the Fed's March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street's forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing - think less than 100K - report will derail the Fed from hiking for the second time in three meetings.

Here are some of the more notable forecasts for tomorrow's number::

• Westpac 170K
• Bank of America 185K
• BNP 185K
• Barclays 200K
• Deutsche Bank 200K
• Goldman Sachs 215K
• Nomura 235K
• Morgan Stanley 250K

Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:

• Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)
• Unemployment Rate Exp. 4.70% (Prey. 4.80%, Dec. 4.70%)
• Average Hourly Earnings M/M Exp. 0.30% (Prey. 0.10%, Dec. 0.20%)

Consensus calls for an increase of 193K jobs in February, with the unemployment rate falling to 4.7% from 4.8%. Much of the focus could be on average hourly earnings for signs of inflationary pressure. Last month, average hourly earnings disappointed with Y/Y wage growth slowing to 2.5% from 2.9%. This month, average hourly earnings are expected to pick up to 2.7% Y/Y with monthly growth of 0.3%.

A look at recent data, courtesy of RanSquawk

Labor market data has continued to be strong. Initial jobless claims have fallen their lowest level since March 1973. The employment components from the two most recent ISM reports also indicate an improving labour market. The non-manufacturing ISM employment component showed increased from 54.7 to 55.2 while the manufacturing component showed further expansion, albeit at a slightly slower pace at 54.2. Wednesday's ADP employment report showed a massive 298K jobs created in February, above the expected 190K, although there is often a large discrepancy between the ADP and the official Nonfarm Payrolls figures and it cannot be relied on as an accurate indicator of Friday's report.

Factors arguing for a stronger report:

• Jobless claims. Initial claims for unemployment insurance benefits moved lower, averaging 244k during the five weeks between the January and February payroll survey periods. This represents the lowest level of claims on this basis since the 1970s. The impact of seasonal adjustment difficulties on the jobless claims data is most pronounced in January, the sustained improvement in jobless claims through February suggests improvement in the underlying pace of layoffs, and in the labor market more broadly.
• ADP. ADP reported a 298k rise in private payroll employment in February, its fastest pace in nearly three years and well above expectations of +187k. Large surprises in the ADP report tend to be predictive of the subsequent nonfarm payroll surprise. Additionally, the 66k rise in ADP construction employment suggests scope for above-trend growth in weather-sensitive payrolls categories.
• Warm temperatures and minimal snowfall. February exhibited unseasonably warm weather and relatively limited snowfall, both of which are likely to boost payrolls in weather-sensitive industries. According to NOAA (National Oceanic and Atmospheric Administration) data, snowfall during the calendar month totaled 4.0 inches, the third lowest accumulation in a February since 2006. Snowfall was also unseasonably low during the payrolls survey week, and as shown in Exhibit 1, such a pattern is associated with strong growth in weather-sensitive industries, including construction, retail trade, and leisure and hospitality.
• Service sector surveys. Most employment components of service sector surveys either improved or remained at elevated levels in February, and all remained in expansionary territory. The ISM non-manufacturing employment component rose to a 5-month high (0.5pt to 55.2), the New York Fed index increased to a 18-month high (+1.8pt to +18.9, SA by GS), and the Dallas Fed employment component edged up (+1.1pt to +5.9). Meanwhile, the Philly Fed non-manufacturing employment index pulled back from a 1-year high (-7.1pt to +12.4) and the Richmond Fed employment index edged down (-1pt to +7), though both indices remained at encouraging levels. The key labor market subcomponent of the consumer confidence report also remained strong (-0.1pt to +5.9), less than a point below cycle highs. Service sector payroll employment increased 192k in January and has increased 165k on average over the last six months.
• Seasonals. Since 2010, February payroll growth has surprised positively relative to consensus in six of the seven instances, with an average surprise of +36k. This may suggest some additional upside risk to the extent the BLS seasonal factors have not fully evolved to reflect this tendency.

Factors arguing for a weaker report:

• Federal Hiring Freeze. The new administration’s hiring freeze for federal workers (excluding defense and public safety) went into effect on January 23rd, one week into the February payrolls survey period. Some departments may be able to circumvent the impact of the hiring freeze though reduced attrition or increased contracted hiring. However, news reports have indicated reduced government hiring in some subindustries/departments, such as shipbuilding and social assistance/child care. Accordingly, the hiring freeze may weigh on government payrolls in tomorrow’s report, with an overall drag in categories affected of 10k-15k.
• Labor Supply Constraints. Economists view the labor market as close to full employment, and as slack diminishes further, this should exert upward pressure on wages and potentially downward pressure on job growth – particularly as the unemployment rate in a given industry or geography falls meaningfully below its structural rate. In the February NFIB small business survey, 32% of firms reported having job openings that were hard to fill, the highest percentage since 2001. Additionally, the Beige Book for the March FOMC meeting included anecdotal evidence of more widespread labor scarcity, as some districts reported labor shortages of skilled workers and of workers in the leisure and hospitality, construction, and manufacturing sectors.  Over the past two years, this trend toward diminished slack has coincided with slowing payrolls growth, raising the possibility that labor supply issues may already be constraining job growth at the margin. The right panel of the same exhibit compares job growth with labor market slack across industries. Below-average unemployment rates in 3Q16 were associated with below-trend job growth over the subsequent four months, potentially suggestive of labor supply effects. Tentative Evidence that Labor Supply Constraints Are Beginning to Weigh on Job Growth

• Transportation jobs. Transportation and warehousing payrolls have seen elevated growth in December in recent years followed by softer growth or outright declines in January and February, a phenomenon likely driven by the combination of the secular shift toward online holiday sales and the slow evolution of the BLS seasonal factors. Payroll data this winter have so far exhibited the same pattern, and we expect tomorrow’s report to show restrained growth in the transportation and warehousing industry as a result.
• Job availability. The Conference Board’s Help Wanted Online (HWOL) report showed a sharp decrease in online job postings (-7%), the third consecutive monthly decline. However, we place limited weight on this indicator at the moment in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads.

Neutral Factors:

• Manufacturing sector surveys. The employment components of manufacturing surveys were mixed in February, though all remained in expansionary territory. The ISM manufacturing employment component pulled back from to a 30-month high (-1.9pt to 54.2), and the Philly Fed employment index also slowed (-1.7pt to +11.1). Meanwhile, the Kansas City Fed (+11pt to +17), Empire State (+3.7pt to +2.0), Dallas Fed (+3.5pt to +9.6), and Richmond Fed (+2pt to +10) employment indices improved. The Chicago PMI employment index also rebounded back into expansionary territory. Manufacturing payroll employment rose 5k in January, its second consecutive increase.
• Job cuts. Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment declined by 2k to 33k in February, though the level of announced layoffs remains somewhat above recent lows.

Fed Impact

The Fed speak in the week before the blackout period was consistent with a hike at the March meeting, but despite signalling rate increases going forward, most cautioned that path of rate increases will be gradual. Most have also stated that the labor market is at or near full employment and so focus will be on the wage data for expectations on the number of hikes this year. As mentioned previously, the average hourly earnings data disappointed last month but if earnings pick up faster than expected it could lift expectations for the number of rate hikes in 2017, with markets currently split between two to three hikes this year. The Fed's most recent projections also saw most Committee members favouring either two or three hikes in 2017.

Market Reaction

As usual with the NFP report, there is often a kneejerk reaction to the headline payrolls number. A stronger than expected number historically sends the USD higher and Treasuries lower and vice versa for a weaker number, before markets digest some of the other details of the report.

If wages disappoint for the second month in a row, then markets may begin to ease back their hiking expectations for the rest of the year and we could see some steepening of the Treasury curve after the flattening observed in the wake of the strong ADP report on Wednesday. For markets to price out a rate hike in March, wage growth would probably need to slow markedly and the headline NFP number to fall well below 100K.

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Finally, here is the all-important Goldman's preview (exp. +215K):

• We estimate that February nonfarm payrolls increased 215k in February, following +227k in January and compared to the three-month moving average of +183k. Reasons to expect a strong report include favorable weather effects, the strong hiring trends indicated in the ADP employment report, and a further drop in jobless claims to their lowest levels since the 1970s.
• We estimate that the unemployment rate fell one tenth to 4.7%, driven by continued household employment growth and a potential pullback in the participation rate following last month’s 0.2pp rise. The January unemployment rate rose to 4.78% on an unrounded basis after hitting a cycle low of 4.65% in November. 
• We also forecast average hourly earnings increased 0.3% month over month and 2.7% year over year, reflecting tightening labor markets and the continued impact of state-level minimum wage hikes.
• Labor market indicators generally strengthened in February, with a drop in jobless claims to four-decade lows, an acceleration in ADP employment growth to its fastest pace in nearly three years, and improvement in the ISM services employment index to a 5-month high. We also believe unseasonably warm temperatures and minimal snowfall boosted job growth in weather-sensitive industries. On the negative side, we look for a 10-15k drag in the government sector from the federal hiring freeze implemented in late January (we forecast +225k for private payrolls). Additionally, we believe diminished labor market slack may exert upward pressure on wages and possibly some downward pressure on job growth in certain industries.
• We estimate the unemployment rate fell one-tenth to 4.7%, driven by continued household employment growth and a potential pullback in the participation rate following last month’s 0.2pp rise. The January unemployment rate rose to 4.78% on an unrounded basis after hitting a cycle low of 4.65% in November.
• Finally, we estimate average hourly earnings increased 0.3% month over month and 2.7% year over year, reflecting diminished labor market slack, firming wage growth, and the continued impact of January’s state-level minimum wage hikes, which affected 19 states and increased the effective national minimum wage by about $0.25 (to $8.50 per hour). In this context, we were surprised by the relatively muted wage growth in the January report (+0.1% mom), and we note the possibility of upward revisions or above-trend growth in tomorrow’s report.