Will the Fed Blink after the Jobs Report?

While the main headlines this week will be about the upcoming battle over the Biden Administration’s infrastructure bill, that will be a more lengthy affair than the short attention spans of traders can stand. They will be more focused on digesting the March job report and looking for any change in tone from the Fed as six different members have speaking engagements scheduled this week headlined by Chairman Powell’s Thursday address with the IMF regarding the global economy.   While the headline beat of the jobs number was impressive, adding close to a million new workers, the Fed is also focused on a rebound in the labor force, still down by more than 2 million from a year ago, and getting the underemployment rate back to pre-pandemic levels. Currently, it stands at 10.7% versus 6.9% pre-COVID. We think the Fed speak this week will continue with the refrain that while the job growth is encouraging, there remains plenty of damage to repair.   That being said, the market will be looking for any backpedaling from the rate and economic outlook offered last month, and if they find it they are likely to continue pricing in fed funds rate hikes faster than the post-2023 timeframe offered by the Fed’s March dot plots.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.02% +0.01%
6 Month 0.03% +0.01%
1 Year 0.06% Unch.
2 Year 0.13% +0.07%
3 Year 0.38% -0.01%
5 Year 0.97% +0.11%
10 Year 1.72% +0.04%
30 Year 2.37% -0.01%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.20%
6 Mo LIBOR 0.19%
12 Mo LIBOR 0.28%
Swap Rates  
3 Year 0.561%
5 Year 1.097%
10 Year 1.764%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Apr 5 ISM Services Index Mar 58.9 59.0 55.3
Apr 5  Factory Orders Feb -0.5% -0.5% 2.6%
Apr 6 JOLTS Job Openings Feb 6.9mm 6.9mm 6.9mm
Apr 7 Trade Balance Feb -$70.5b -$70.4b -$68.2b
Apr 7 FOMC Meeting Minutes Mar 17 NA NA NA
Apr 9 PPI (MoM) Mar 0.5% 0.5% 0.5%
Apr 9 PPI (YoY) Mar 3.8% 3.8% 2.8%
Apr 9 PPI Ex-Food & Energy (MoM) Mar 0.2% 0.2% 0.2%
Apr 9 PPI Ex-Food & Energy (YoY) Mar 2.7% 2.7% 2.5%

Top 5 Events for the Week

April 5— 9, 2021

1. Fed Speak and FOMC Meeting Minutes—All Week

After the March jobs report easily beat expectations the market will be looking for any change in tone from the Fed as six different members have speaking engagements scheduled this week headlined by Chairman Powell’s Thursday address with the IMF regarding the global economy. Also, the FOMC minutes from the March 17 meeting will be released on Wednesday and they’ll get the usual going over to detect any heretofore unseen nervousness about what looks to be a robust recovery that is gaining momentum. That being said, while the headline beat of the jobs number was impressive, adding close to a million new workers, the Fed is also focused on a rebound in the labor force, still down by more than 2 million from a year ago, and getting the underemployment rate back to pre-pandemic levels. Currently, it stands at 10.7% versus 6.9% pre-COVID. We think the Fed will continue with the refrain that while the job growth is encouraging, that there remains plenty of damage to repair. That being said, the market is pricing in a fed funds rate at 48bps by December 2023, and any hint of nervousness on the Fed’s part will only add to additional pricing of Fed hikes in 2023.

 

2.March ISM Services Index—Monday

After the highest ISM Manufacturing Index in 38 years last week he ISM Services Index this morning will try to impress investors with an expected print of 59.0 versus 55.3 in February. It’s been obvious from the beginning of the pandemic that services businesses, those dealing in face-to-face transactions, have suffered the most in the last year but the time may be coming for it to start to rival the manufacturing sector with solid expansionary gains given the spreading vaccination rates. The Services Index peaked at 60.9 in October 2018 so an expected print of 59.0 would reflect a services sector that is well on the way to repairing the damage done in the past year. Coming early in the week it could also influence the above referenced Fed Speak for this week if it reveals robust strength as did the ISM Manufacturing Index and the March jobs report.

3. February Job Openings and Labor Turnover Survey—Tuesday

The labor market has definitely regained its momentum with back-to-back solid months a negative print in December and a so-so January. The JOLTS Job Openings Survey provides some additional details that are not in the more famous BLS Employment Report. Even though the report is a month behind the information will be of interest to policy makers and investors. Expectations are for 6.9 million openings matching the  6.9 million in the prior month. Job openings peaked at 7.5 million in November 2018. The Quits Rate will be checked as well as it measures the confidence level of workers who voluntarily leave a job in search of a better one. The rate rose to 2.3% of all workers in January which equals the rate a year ago. It dipped as low as 1.4% in April 2020, so it seems worker confidence has returned to the level it was pre-pandemic.

4. March PPI—Friday

With the strong March jobs report, and with consumers ready with stimulus checks in hand, investors are expecting to see an upsurge in pricing pressure and while it has largely been missing from the CPI numbers to date, producer prices have been showing unmistakable increases. For March, the overall PPI is expected to gain 0.5% matching the gain in February. Year-over-year the rate is expected to be 3.8% versus 2.8% in February. The core PPI rate ex-food and energy is expected to increase 0.2% matching the increase the prior month. The year-over-year rate is expected to be 2.7% versus 2.5% in February. Pricing pressure is being experienced at the producer level but so far those price increases have not been totally passed through to the consumer. The question is are they likely to be soon? We think so.

5. February Trade Balance—Wednesday

The trade balance numbers have largely reflected what we already know and that is the US economy is rebounding faster and with more gusto than other developed economies. Europe is still  in hand-to-hand combat with the virus and Asia is recovering but at a more tentative pace than the US. What that means is the US economy is demanding more overseas goods and services than it is exporting and that is widening the trade balance numbers. For February the trade deficit (goods and services) is expected to widen to -$70.5 billion versus -$68.2 billion in January. If we hit the expected number that will be largest deficit recorded and the first time breeching the $70 billion level. Again, that will be a reflection of the divergence between the US economy and the rest of the world.


Yield Universe

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Published: 04/02/21 Author: Thomas R. Fitzgerald