February Jobs Report a Final Hurdle for Fed's Next Rate Rise

After a blockbuster private-sector jobs report earlier this week, Wall Street is anxiously awaiting the Labor Department’s monthly non-farm payrolls report due out Friday morning for further indication the economy is ready for higher interest rates. 

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The Labor Department is expected to say the U.S. economy added 190,000 net new jobs in February, while the unemployment rate is seen ticking down to 4.7% from 4.8% in January as wages – a closely watched metric that’s been slow to grow – are expected to rise 0.3%, a higher pace than the prior month’s 0.1% uptick.

“Only a tragic employment report would derail the Fed’s plans to hike next week, and even then it would probably be dismissed as an anomaly,” said Dan North, chief economist at Euler Hermes North America.

The government’s figures, typically released on the first Friday of every month, are one week behind this month due to a calendar quirk during the data-collection period, and come after payroll processor ADP reported on Wednesday the private sector added 298,000 new jobs last month, 108,000 more than Wall Street analysts expected. It was the fastest pace of monthly growth seen in nearly three years, thanks to a jobs surge in the goods-producing sector and mild winter weather, said Mark Zandi, chief economist at Moody’s Analytics, which compiles the report for ADP. 

While the ADP report showed goods-producing industries notched gains of 105,000 last month and 55,000 in January, construction, manufacturing, and natural resources have also been areas of strength for the private sector as the manufacturing industry overall has rebounded over the last year. Data from the Institute for Supply Management last week showed six-straight months of expansion for the industry, while its closely-watched gauge of factory activity spiked to the highest level since August 2014

While optimistic about Friday’s Bureau of Labor Statistics (BLS) report, UBS Economist Samuel Coffin warned ADP’s February figures may exaggerate the pickup in U.S. employment since they can be sensitive to recent payrolls moves.

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“Much of the pickup in the ADP figure may simply reflect some benchmarking to stronger official figures from the BLS. And that BLS trend was probably exaggerated by swings toward warmer weather in January. In addition, there is some recent upward bias to APD estimates … and Februarys alone have shown some bias,” he said pointing to an average overestimation of 41,000 for February payrolls figures.

The Federal Reserve will be closely monitoring the Labor Department’s latest figures for further reassurance the U.S. economy can withstand higher short-term interest rates. In the last week, expectations for a rate rise at the central bank’s March 14-15 policy meeting skyrocketed on the heels of a slew of better-than-expected economic data – including the ISM and ADP figures – and President Donald Trump’s emphasis on made-in-America initiatives and job growth efforts in his first address to a joint session of Congress last week.

CME Group federal funds futures, a tool depicting market expectations for changes in monetary policy, show a 90% probability of a 0.25 percentage point increase in the Fed’s benchmark interest rate this month.

Fed officials, including chair Janet Yellen, have been in a rush to prep the market for a sooner-than-later rate rise. On Friday, she said with the labor market “in line” with median estimates of its longer-run normal level and inflation just below 2%, “a further adjustment of the federal funds rate would likely be appropriate” at next week’s meeting. 

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