March 8 – The “Jobs” theme continues this morning on Wall Street, as traders react to the latest numbers from the government that will impact monetary policy decisions by the Federal Reserve when they meet in 12 days. The VIX firmed to trade near 15 this morning ahead of the jobs report release, but dropped back to 14 after it. The dollar index is trading near a fresh seven-week low 102.5. Yields on 10-year Treasuries are trading near 4.07%, while yields on 2-year Treasuries are trading near 4.44%. Crude oil prices are modestly lower, while grain and oilseed prices are mixed to weaker ahead of today’s USDA WASDE crop report.
The economy created 275K jobs in February, beating analyst expectations of 190K jobs created. Yet, the January number was revised to 229K jobs created, down from the 353K originally reported. December was also revised down by 43K jobs created. The unemployment rate rose to 3.9% in February, up from analyst expectations that we would remain flat at 3.7%. Stock futures came off their lows on this rise in the unemployment rate on ideas that today’s numbers will encourage the Fed to move closer to that first rate cut. Manufacturing lost another 4K jobs in February, as that sector remains in a recession, but the private sector created 223K jobs, while government created another 52K jobs. Today’s report indicated that 5.7 million people say they want a job, but they haven’t looked for a job in the past four weeks. Another 1.6 million people said that they want a job, and they had looked for a job at some point in the past four weeks. Food service and drinking establishments added 42K jobs in February, while construction added 23K and social assistance added 24K jobs. So the data would suggest that jobs are being added at a good clip, although the significant revisions that happen each month give some reason to question where the numbers are really at. The labor force participation rate remained unchanged at 62.5% in February.
Wages are another key data point in this report that will impact Fed policy. Today’s report showed that average hourly earnings rose by just 0.1% month-on-month in February, down from 0.5% in January, and below analyst expectations of 0.3%. Yet, average hourly earnings rose 4.3% year-on-year in February, down from 4.4% the previous month, but matching analyst expectations of 4.3%. The average workweek rose slightly to 34.3 hours, up from 34.2 hours the previous month. These numbers would suggest some modest easing in wage inflation.
Fed fund futures tipped a bit more toward a possible May rate cut by the Federal Reserve in the moments immediately following the release of this morning’s jobs report, although the overall expectations of the market remain in the camp of the June meeting for the first rate cut. The Fed is expected to release another dot plot graphic at its meeting in 12 days that will give us a sense of the thinking of individual policymakers. We very well may get a rate cut in June, because the Fed is facing pressure to do something after more than a year of expectations, but there’s no pressing reason to do so. But whether it does cut its rate in June or not, I still expect a reinflation risk as we move into the middle of this year. The one-year breakeven inflation rate recently rose to trade near 4%, which is more than double where it was at the December Fed meeting. That tells me that the market agrees with what I’ve been saying for a long time – that we haven’t yet fixed all the structural issues beneath this inflation problem.
China canceled two more cargoes of US soft red winter wheat purchases today. More may be coming. USDA will release its March WASDE crop report at 11 a.m. Chicago time. The primary focus of the trade will be on USDA’s corn and soybean production estimates for Brazil. USDA surprised the trade by only lowering Brazil’s soybean production estimate by 1 million metric tons to 156 mmt in February, while most private estimates are either side of 150 mmt. Another very modest reduction, or possibly a bounce in the estimate, would likely be seen in bearish by the trade, while the bulls could be encouraged if we see a more significant reduction. It’s still early for major changes in the corn production number, with Brazil still wrapping up planting of the big winter (safrinha) corn crop that makes up more than three-fourths of its corn production, and which provides the bulk of its exportable corn supplies. For the past several months, our team in Brazil has emphasized that they were more concerned about this winter corn crop than they were the soybean crop. The risks certainly are higher for the monsoon rains to end too soon in a year in which El Nino is dying. But it should also be pointed out that forecast models that had been dry for the critical April pollination period trended wetter over the past week. That very well may be an aberration in an otherwise drier trend, but history also shows that we cannot know for certain how this will play out, keeping risks in place for both a short crop or even a big winter corn crop. The next month will tell us a great deal.
