Hot Or Cold?

Friday's U.S. jobs report is taking on more importance than we have seen in some time.

Traders took to the sidelines on Wednesday and appear to be doing the same today. Friday’s U.S. jobs report is taking on more importance than we have seen in some time.

Stock traders want to see something that is not too hot and not too cold. They’d deem as acceptable anything in the range of 150,000 to 250,000. Anything higher than 250,000 might scare both stock and bond traders.

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Bond traders are hoping for a report that is cold, cold, cold, and the hourly wage component is what they will care about the most.

Bond traders are hoping for a 0.0-0.1% report on wages after January’s 0.5% jump, and a big retreat after a prior month’s jump would fit the pattern. Starting with the wage gain in last month’s jobs report, every inflation indicator released has come in higher than expected. Although the hourly wage component is not an inflation indicator, it is considered a critical input into inflation expectations. Bond traders can look past a lot of economic growth numbers, but inflation is the one thing that can take the bond market down.

After trading most of January and February under the assumption the Fed might tighten one time only late in the year or not at all, recent data and calmer markets are causing traders, especially bond traders, to question that view. The jobs report might alleviate that new concern or confirm the economy is better than has been depicted.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

March 3, 2016

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