Big fake out in tomorrow's job report possible

Aaron Pressman

With news of the Fed and the future path of its rate hike campaign driving the market of late (mostly downwards), tomorrow's Labor Department report on jobs could have an impact well beyond the bond market. The consensus forecast, according to the WSJ, is for a gain of 218,000 jobs. But weather-related distortions over the past two months may lead to a happy surprise on Friday that ends up being more tearful in weeks to come, according to Morgan Stanley analyst David Greenlaw.

At the beginning of the year, investors expected that the Fed was almost done raising interest rates. With rates still at historically low levels, the odds of a recession seemed low, the soft landing was looking good and equity markets were on the march. But faster than the BIFF, BAMM and KA-POW on an old episode of Batman, the Labor Department's January payrolls report knocked the happy consensus on its keister, as I discussed last month on the blog. Since then, the debate has gone back and forth a few times, this week with the “economy strong, more rate hikes” camp seemingly in control.

And that's where Morgan Stanley’s Greenlaw enters the picture. His theory is that January's job picture was artificially pumped up by warm weather – as 2006’s first month was the mildest in a century, he writes. The category of "people not at work due to weather" declined from December for the first time since 1986. That year, February payrolls came in lighter than surrounding months, he notes. For February 2006, in addition to some catch up for the excess of January, there was also a blizzard impacting the employment data. All in all, he's predicting that Labor will report far fewer than expected jobs created last month, just 100,000. If he's correct, the markets might take it as a sign of weaker growth, thus fewer Fed hikes and higher stock and bond prices. Both stocks and bonds are flashing “oversold” conditions today, according to some technical market watchers, setting up a nice bounce off a weaker jobs reading.

But Greenlaw's ultimate point is that a February report on the low side would just be another fake out. "Since we believe that the underlying state of the labor market is quite healthy, we would expect any negative weather-related impact on the February data to be recouped in March," he writes. And so, expect markets to continue doing the Bernanke bop for another month at least.

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