Halyard’s Weekly Wrap – 3/8/24 – Fed’s Quiet Time

At first glance the employment report for February was surprisingly strong.  The expectation was that the economy would add 200,000 new jobs, up from an expected 188,00 last week.  The actual change in payroll was 275,000.  The year-over-year change in average hourly earnings was 4.3%, 0.1% lower than it registered last month but still an impressive uptick.

However, street economists are characterizing the number as portraying a slowing economy.  They point to the unemployment rate, which rose to 3.9% from 3.7% last month.   That rate is derived from the change in household employment and the change in the labor force and tends to be quirky for several reasons.  The first is the household employment is much more volatile than the non-farm measure, and the methodology is different for both. In February, the labor force grew by 150,000 but household employment contracted by 184,000.  We’d classify that as noise, but taken together it resulted in the 0.2% uptick in the unemployment rate.  In comparison, last December the labor force contracted by 676,000 workers and household employment fell 683,00; both undesirable outcomes, but the result was no change to the unemployment rate.  We place greater value on the fact that non-farm employment has grown by more than 225,000 in each of the last three months.  Growth in employment in excess of 200,000 is usually associated with an accelerating economy.  Despite that Chairman Powell in testimony before Congress this week said the Fed is likely to cut rates later this year.  Cutting the overnight rate is tantamount to stimulating the economy.

To be sure, since the December economic projections, the Fed has forecast that they would cut rates by 75 basis points this year and that’s reflected in the December 2024 Fed Fund futures contract.  The future is also indicating a possibility that the first cut will come as early as June.

Looking to next week, the government will release CPI and retail sales.  The year-over-year expectation for CPI is down from last month’s 3.9%, but still elevated at 3.7%, an outcome that makes a rate cut justification a challenge.  Retail sales are expected to bounce back from the terrible sales data from January.  That month sales contracted -0.8% in a post-holiday contraction.  The expectation is that the census bureau will report a gain of 0.8% for the month.

The calendar is clear of Fed speakers between today and the March 20 FOMC meeting, so economic data will dominate trading.