A March Fed Rate Hike, the February Employment Report and the Markets

The markets -- stocks, Treasuries and FX -- should be able to weather a 25 BP rate  hike at the March 14-15 FOMC Meeting, which is now a near-certainty given last week's Fedspeak, without much if any damage.  What will be required is that the Fed not change its 2017 forward guidance of 2-3 rate hikes nor its Central Tendency forecast of 1.9.0-2.3% Real GDP Growth and 1.7-2.0% Inflation.  By the Fed sticking with this outlook, the rate hike just would be one step on an already known path, and the stock market should continue to rally and Treasuries and the dollar remain range-bound. 

It is likely that the Fed will not change its forward guidance or forecasts.  Yellen and other Fed officials said last week that they favor a gradual approach to tightening, consistent with the existing forward guidance.   Also, this Friday's February Employment Report should support the view of decent economic growth with little inflationary pressures, consistent with the Fed's forecast.  Somewhat higher short-term interest rates in the context of a strong economy should not precipitate a stock market correction.  And, longer-term Treasuries could tolerate the economy's growth if inflation does not appear to be a developing problem.

The continuing warm weather likely resulted in an above-trend gain in Payrolls this month.  (Fed officials consider trend payroll growth to be in the 75-125k range, mentioned by Yellen last week.)  This Wednesday's ADP Estimate should give a reliable handle on whether Payroll will print above this trend.   The February ADP Estimate has under-estimated Private Payrolls in each of the past 5 years, with a 6-76k range of underestimates  (average under-estimate 34k).   So, the risk is for Payrolls to print somewhat higher than the ADP Estimate -- a mirror image of what history had suggested for January Payrolls.  Consensus is for both the ADP Estimate and Payrolls to print 190k m/m. 

Calendar considerations suggest a 0.1-0.2% m/m increase in February Average Hourly Earnings.   The y/y would inch up to 2.6% from 2.5% in January, staying within its recent range.