This week's critical events may prove positive for the stock market, but it is not a slam dunk. Fed Chair Powell's Semi-Annual Monetary Policy Testimony should repeat the moderate message from the January FOMC Meeting, supporting the idea of a 25 BP hike at the March meeting -- a positive. And, most February labor market data are expected to ease. But, the data may not soften enough to calm market fears of Fed tightening.
The Fed's Semi-Annual Monetary Policy Report was released on Friday. It reflects the consensus view of the FOMC as delineated in the latest FOMC Statement. So, there is nothing new in it. It repeats that inflation is too high and the labor market too tight. Again, it points out that some inflation tied to supply disruptions is easing and that housing rent should slow later this year. It argues that a slowdown in non-housing services prices, much of which is tied to wage inflation, needs to be seen ahead. To this end, economic growth is expected to slow ahead. The Report does not specify how much further monetary policy needs to tighten to achieve this, except to the extent shown in the Central Tendency forecasts.
There are two key labor market reports to be released this week -- the January JOLTS Data and February Employment Report. Consensus looks for the JOLTS data to show a decline in Job Openings to 10.6 Mn from 11.0 Mn in December. While the downward direction is desirable, the level is still well above the pre-pandemic 7.5 Mn Openings. Private surveys support the idea of a decline, according to news reports. Although the Report could persuade the Fed that the labor market is moving in the right direction, its still-high level would leave open the door for further Fed tightening ahead.
Consensus looks for the February Employment Report to show a sharp slowdown in Payrolls to 200k m/m from 517k in January, but a steady 3.4% Unemployment Rate. The Claims data and other evidence support the expectation of a Payroll slowdown. But, the Claims data don't suggest a sharp softening in demand for labor. Moreover, warm weather could boost jobs in February, as it probably did in January. So, the consensus estimate risks being too low. The market could excuse a higher-than-consensus Payroll print if the Nonfarm Average Workweek falls by more than the consensus estimate (34.6 Hours versus 34.7 Hours in January) or if the Unemployment Rate rises. A Workweek decline could presage slower job growth ahead. An increase in the Unemployment Rate would move in the Fed's desired direction. Finally consensus looks for a moderate 0.3% m/m increase in Average Hourly Earnings (AHE), the same as in January and below the 0.4% recent trend. So, it would be a market positive.
Last week's release of Q422 Labor Compensation/Hour had some positive news for the Fed. The data, which reflects benchmark revisions and is the broadest measure of labor costs, show that last year's labor cost inflation (Q4/Q4) was closer to the pre-pandemic pace (2019) than were the other major measures (AHE and Employment Cost Index) -- see table below. It suggests the Fed may be able to achieve its 2% inflation goal without aggressive tightening. Powell may be comfortable saying a modest increase in the Unemployment Rate could suffice when he gives his testimony this week. While Compensation/Hour sped up in Q422 (q/q, saar), unlike the other two, it could have resulted from a jump in one-off bonuses.
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