Since U.S. equities plunged into "correction" territory in early February, stock prices have bounced around as fear turns to greed and then back to fear. But the magnitude of those moves is diminishing, tightening the trading range of the Dow Jones industrials as investors await clarity on two major issues: President Trump's and the latest jobs numbers on Friday.
Remember, it was the inclusion of better-than-expected wage data in the January jobs report that set off the market rout since early February on fears higher wages would fuel inflation and spark a more aggressive pace of rate hikes from the Federal Reserve.
Any breakout from this pattern should carry momentum, either setting up a push to new highs (especially for the tech-heavy Nasdaq) or a possible test of the February lows. And that means investors are going to be poring over every little detail in the February nonfarm payroll report. Here are three key factors to watch for.
Economists are looking for the unemployment rate to fall one percentage point to a 4 percent rate on a payroll gain of 205,000. This would be an extension of January's strong 200,000 print. Such a drop in the jobless rate would bolster the argument that the economy is at full employment and thus, on the verge of a bout of wage-push inflation.
Already, unemployment is below the Fed's current estimate of a "natural" rate of 4.7 percent -- a level that it expects to remain more or less stable past 2025. Research by the Federal Reserve Bank of San Francisco noted that this natural rate has remained relatively consistent over the last 100 years, hovering between 4.5 percent and 5.5 percent.
Labor force participation rate
Some have dismissed this measurement of employment, preferring to look at alternative measures of labor utilization such as labor force participation. But that measure is marred by secular demographics -- namely, retiring baby boomers. When compensated for that retirement wave, the figures reveal that the job market is indeed tight. Business surveys showing that skilled workers are in short supply today bolster that view.
Nevertheless, the consensus is for the labor participation rate to hold steady at 62.7 percent.
This is the biggie: When the January numbers were reported on Feb. 2, the annualized growth rate in average hourly earnings surprised to the upside with a 2.9 percent result (vs. the 2.6 percent expected). That was the best wage showing to date in the recovery and marked an acceleration from the upwardly revised 2.7 percent result for December.
Economists expect this rate to hold steady at 2.9 percent.
Bank of America Merrill Lynch analysts noted that various readings of the labor market from indicators including the ISM manufacturing activity report and consumer confidence surveys are at or near cyclical highs. Moreover, initial weekly jobless claims are near historic lows dropping to levels not seen since 1969.
But the analysts believe one-time weather factors in January could result in some giveback in the average hourly earnings measure for February. Capital Economics agrees on this point, but it has penciled in an upside surprise for payrolls -- it's looking for 250,000 new jobs. And it notes that "the big picture is that wage growth will trend higher this year."