Should be an interesting morning tomorrow.
The U.S. government is set to release the jobs report for March at 8:30 a.m. New York time. Economists surveyed by Briefing.com are looking for the economy to add a net 180,000 jobs. That projection could be low, however, since the private ADP Employment Situation Report released yesterday showed the economy adding a much stronger than expected 263,000 jobs.
Which is where it gets interesting. The financial market has spent the trading sessions after the release of the minutes from the Federal Reserve’s March meeting convincing itself that interest rates–especially rates in 2018–aren’t going up as fast as the Fed has promised. The way a sizable majority on Wall Street read the minutes, the Fed’s talk of starting to reduce its $4.5 trillion balance sheet starting in the last quarter of 2017 means that the central bank won’t follow through on projections for three interest rate increases in 2018 after three interest rate increases (with one delivered so far) in 2017. Since a Fed decision not to continue to roll over maturing Treasuries and mortgage-backed securities now in its portfolio would amount to a de facto tightening of the money supply, Wall Street is arguing, the Federal Reserve won’t both starting reducing the size of its balance sheet and decide on three interest rate increases in 2018. That would be too much tightening all at once.
This logic helps explain the otherwise tough to figure behavior in the market for 10-year Treasuries where yields have dropped from 2.39% at the end of last week to 2.34% today. You’d think that yields would be creeping higher not sliding lower. But if the Fed isn’t going to raise interest rates in 2018 as quickly as once assumed, then yields should be moving lower.
I don’t agree with Wall Street’s logic here–I don’t see why it makes any difference whether the Fed tightens the money supply by trimming its balance sheet or by raising its benchmark interest rate–but Wall Street’s argument on interest rates and yields does set us up for an interesting day tomorrow if the jobs number is stronger than expected by economists today.
On the one hand, a stronger than expected jobs report would be good news for the economy since it would indicate that the U.S. economy is growing more strongly than expected. That would be especially good news since growth in the first quarter is forecast to be disappointingly below 2%. (The Fed says it isn’t worried by growth at that level since the economy typically grows slowly in the first quarter.)
On the other hand, a stronger than expected jobs report would give the Federal Reserve more room to raise interest rates–even if it intends to start trimming the size of its balance sheet at the end of the year. And that might mean that Wall Street needs to rethink its logic pointing toward fewer than expected interest rate increases in 2018.
The market has a lot on its mind tomorrow–the end of the China/U.S. meetings, possible war in Syria or with North Korea, a pending shutdown of the U.S. government as funding authority runs out on April 28 and more. Add the uncertainties of the effect of tomorrow’s jobs number to that list.