Monday Update: Strong Jobs Report Paves Way for Rate Hike

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 13, 2017 3:06:03 PM

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monday updateLast week was all about the February employment report, which surprised to the upside for the second month in a row. This was the last remaining hurdle the economy needed to clear before a Federal Reserve interest rate hike, and the positive results essentially ensured that the hike will happen as expected this week. 

A look at last week’s data

Trade deficit worse than expected. On Tuesday, the U.S. trade deficit was reported at $48.5 billion, against an expected decline from $44.3 billion to $47.0 billion. This was the biggest gap since March 2012, due to both a wider goods trade deficit and a smaller services surplus. Imports grew substantially faster than exports, and, overall, trade remains a drag on economic growth.

Jobs offer a very positive surprise. The jobs report, on the other hand, came in much better than expected for the second month in a row.

  • The economy added 235,000 new jobs in February, against an expected increase of 180,000 and up from 227,000 the previous month.
  • The unemployment rate declined from 4.8 percent to 4.7 percent, as expected.
  • Average wage growth for the month came in at 0.2 percent versus the expected 0.3 percent, but the year-on-year change moved up to 2.8 percent, beating expectations.

On the whole, the strong report should provide the final push for the Fed to increase interest rates this week.

The week ahead

The data slated for release covers most areas of the economy.

Consumer prices will be released on Wednesday. The headline rate is expected to be flat for the month, down from a 0.6-percent increase last month. Due to base effects, however, the yearly rate is expected to increase from 2.5 percent to 2.7 percent. Core prices, excluding food and energy, are expected to rise by 0.2 percent, down from 0.3 percent last month, but the annual rate should drop from 2.3 percent to 2.2 percent.

Also on Wednesday, retail sales are expected to decline by 0.1 percent, down from a 0.4-percent increase last month. This isn’t as bad as it looks, however, as a decline in gasoline prices would be the primary cause. Core retail sales, excluding autos, are expected to increase by 0.1 percent, down from an increase of 0.8 percent last month, also affected by the large gas price drop. The most economically representative number, core sales, which excludes autos, gas, and building materials, is expected to do better, with a 0.4-percent increase.

The National Association of Home Builders survey is also due on Wednesday, with a steady result of 65 expected as confidence slowly normalizes to the levels of last year. Another look at housing will come on Thursday, when housing starts are expected to show a small increase, from 1.246 million to 1.255 million.

On Friday, industrial production figures are expected to improve to growth of 0.2 percent from a previous decline of 0.3 percent. Again, this would be better than it looks, as stronger mining and manufacturing results are offset by weak utility production due to warm weather. The core manufacturing output, however, is expected to show faster growth of 0.3 percent, up from 0.2 percent.

Finally on Friday, we'll see the University of Michigan Consumer Sentiment Index, which is expected to improve slightly, from 96.3 to 97.0. This would be a 13-year high, consistent with the other major survey of consumer confidence produced by the Conference Board.

The other economic event this week will be the regular meeting of the Federal Open Market Committee, which is widely expected to raise interest rates by another quarter point. If it does, the consequences should be minor, as the action is already fully priced into markets. Markets will still be watching closely, however, for any new information with respect to the pace of future rate hikes.

Have a great week!

Upcoming Appearances

Are you attending the 2019 FPA Annual Conference in Minneapolis, Minnesota? Be sure to join my “Economic and Market Update” during the Educational Breakout Sessions on Friday, October 18, from 7:45 A.M. to 8:45 A.M. CT. To learn more, visit https://fpaannual.org/.

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