Is The Extreme Volatility Over?

The stock and bond market will hopefully settle down this week after their extreme volatility last week.  The end result of last week's actions are lower stocks and higher longer-term yields, although the volatility suggests it took awhile to figure out the right equilibrium levels.   It may take strong demand at a Treasury auction to signal yields are high enough, however.

One explanation heard is that yields rose in anticipation of higher inflation, sparked by the current increase in commodity prices and fears of very strong growth ahead.  And, the higher yields hurt stocks, particularly in the tech sector.  An implication is that any softening in commodity prices or US economic data should boost both markets.  Perhaps the best outcome regarding data would be if they point to moderate growth and inflation.

Another way to understand what happened is through an "optimal control" approach -- with a large fiscal stimulus bill to be passed soon, the stock and Treasury markets don't have to "work" as hard to lift the economy.  A direct implication of this approach is that a final bill that contains less than $1.9 Tn in fiscal stimulus should boost both stock and Treasury markets.  News reports suggest changes to the House bill will be made in the Senate.  The goal is to get both Houses to pass a bill before March 14, so some give and take may happen.

This week's key US economic data may be moderate enough to calm the markets.  Consensus looks for a speedup in February Nonfarm Payrolls to +165k m/m from +49k in January.  The February estimate is essentially equal to the +167k 2019 m/m average, a year when Real GDP Growth was a modestly above-trend 2.3%.  So, a near-consensus print could trim fears of excessive economic growth near term.

While the Atlanta Fed model's forecast was cut to 8.8% from 9.6% last week, it is still probably too high.  Besides it being much too high relative to Total Hours Worked, as discussed in last week's blog, its Consumption forecast of 7.7% is about 1% pt above the pace suggested by January Real Consumer Spending (released on Friday).

Evidence on February Payrolls is mixed.  /1/ The February survey may have picked up re-hiring by re-opened restaurants.  /2/ School re-openings may continue to lift jobs, as they apparently did in January.   /3/ The extremely cold weather in Texas occurred after the Survey Week, so any weather-related layoffs there won't show up.  /4/ The Claims data don't suggest a very large gain.  Initial Claims averaged 837k over the weeks between the January and February Survey Weeks, not much different from the 844k between the December and January Weeks.  Continuing Claims fell by less between January and February than they did between December and January.  

Consensus looks for a steady 6.3% Unemployment Rate.  The risks are balanced.  The Claims data suggest a dip, but there could be a rebound in the Labor Force after it fell sharply in January.

Consensus looks for a near-trend 0.2% m/m increase in Average Hourly Earnings.  There is downside risk if the bulk of the jobs gain is in low-paid restaurant workers.

The other key data is the February Manufacturing ISM Index.  Consensus looks for an uptick to 58.8 from 58.7 in January.  While a number of already-released business surveys show a dip for February, they could be just catching up to the decline seen in the Mfg ISM in January, which they had missed.  A near-consensus print would show the manufacturing sector remains strong, but is not accelerating.  Non-US survey data so far are mixed for February.  European PMIs improved, but the official Chinese PMI slipped.