Friday's Employment Report

Amey Stone

On Friday, March 4, the government will release its payroll report for February. It's likely to be a very good month. Research firm Action Economics thinks 240,000 new jobs were created -- a nice jump -- as evidenced by fewer people applying for unemployment, rising consumer sentiment, and an increase in help-wanted advertising. In part the spike is just a rebound from a January report that was depressed by all the bad weather that month. February weather, in contrast, was pretty mild.

Here’s where Action Economics’ analysis gets interesting: If payrolls come in lower than expected, the bond market, and maybe the stock market as well, could rally.

"In January the market braced for strength in the employment report, but it was weaker than expected and there was a relief rally," says Rick MacDonald, research director at Action Economics. Since bond yields have also been backing up in advance of February’s report, he thinks there could be another rally in bond prices this month if the report comes in below the high expectations. A relief rally in bonds would probably be coupled with a rally in stocks.

What if the jobs number comes in even higher than the whisper numbers? Since investors are already worrying about inflation and expecting a big jump in payrolls, they might not react too negatively to the news. The big worry would be if there was a jump in hourly earnings, since that would portend higher inflation, rising rates and depressed stock and bond valuations.

That’s not what MacDonald, thinks will happen, however. He expects a near-term rally. That could prove "a good time to lighten up" on bonds, he says. He expects rates to rise over the long-term, even if they take a temporary dip at the end of this week.

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