MNI 5 Things: Markets Eye US Hourly Earnings Cautiously

5 Things To Look For In US Employment Report

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - Friday's US Employment Report should hold few surprises

for the nonfarm payrolls headline number, while average hourly earnings should

be the main event. Rising wage inflation continues to be a concern, with the

median amongst analysts in an MNI survey forecasting for a slowdown to a 0.2%

gain, while markets are hedging to the high side. Analysts are forecasting a

210,000 gain for headline payrolls and 200,000 for private, while also possibly

seeing a decline in the unemployment rate to 4.0%. Average weekly hours are

expected to rise back to 34.4 after falling to 34.3 in January. 

     Ahead of the release, we outline five themes for particular attention.

     - Payrolls are not expected to be the market mover this Friday. An MNI

survey of analysts shows that in the past year, analysts have only

underestimated the headline number twice, with a stronger tendency to

overestimate. However, analysts have underestimated the payrolls number in six

of the last ten February releases, so there could be some upside risk. Since

2011, the February payrolls number has come in stronger than 180,000 each time,

with an average monthly gain of 227,000, so analysts expecting a 210,000 gain

this month should be unsurprised by the headline number. Markets are estimating

a more moderate 202,000 gain, softer than analysts' forecasts. However, analysts

in the past year have been slightly more accurate than the whisper number, with

the absolute average miss for the analysts being 43,000, while whisper has an

absolute average miss of 48,000.

     - In January, average hourly earnings, or AHE, surged 0.3% m/m and pushed

the y/y to 2.9%, likely off of January's unseasonably cold and snowy weather

that prevented some low-wage hourly earners from getting to work. As weather

effects dissipated, February average hourly earnings are expected to post a

softer reading. Weather abnormalities often skew the labor force and temporarily

boost AHE, as lower paid workers have reduced shifts, then the effect reverses

when these workers return and push AHE back down. Thus, February may show a

small scale repeat of the 2017 post-hurricane season, when October's initial

flat AHE shocked market participants that failed to account for the skewed labor

force's role in September's 0.5% m/m surge. While the downward surprise in

October led to fears of softening inflation, a small February print may be a

more welcome outcome - easing market concerns of overheating and rapid rate

hikes.

     - Market participants' expectations for average hourly earnings outpace the

median analyst estimate, with the market whisper number looking for yet another

0.3% month/month gain. If correct, this will be the fourth consecutive month of

0.3% or above wage gains - which would be the longest streak since the series

start in 2006. Given the demonstrated volatility in AHE, a fourth surge is

unlikely. However, markets have correctly forecasted AHE for the past three

months, which suggests a possible upside surprise to analysts' forecast of a

0.2% gain. While a 25bp hike is already baked in for the March FOMC meeting,

another 0.3% gain or stronger would fuel market anxieties and push futures down

and treasury yields higher, likely surpassing last month's lows.

     - Despite the Fed stating that they believed that unemployment was either

near or a little beyond full employment in their semi-annual monetary policy

report, the median expectation is that unemployment rate will slip even lower,

to a 4.0% rate. This would mark a new cycle low, and be the lowest rate seen

since December 2000. If unemployment does slip to 4.0%, it could raise further

questions on how low full employment is and whether the current level is already

unsustainable. While Chair Powell did note that full employment could be as low

as 3.5% in his Senate testimony, he also cautioned that the Fed is watching and

does not want to get "behind the curve," and, "have inflation move up and have

to raise rates too quickly."

     - Analysts have been citing initial unemployment claims reaching historic

lows as a reason to expect a large rise in payrolls. There has been an inverse

relationship between the change in survey weeks and the change in headline

payrolls in the last year. However, January stepped out of sync with claims

rising between survey weeks, but payrolls also seeing a significant gain. This

could lend itself to February payrolls potentially continuing the break in

trend. However, recent February data suggest payrolls will see a healthy gain,

with significant emphasis in the manufacturing sector. The ISM manufacturing

employment index bounced back up to 59.7 while the regional Fed indicators also

saw rises in their employment sectors.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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