Jobs Report Preview, May 5, 2017

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For the first time in 2017, the risks to tomorrow’s jobs report are balanced, as a “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability for better economic growth to push stocks materially higher.

Here’s The Sevens Report traditional “Goldilocks” breakdown:

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase. A number this hot would likely reignite the debate over whether the Fed will hike more than three times this year.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)

  • 125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

  • < 125k Job Adds. Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks.
  • Likely Market Reaction: Withheld for subscribers. Unlock with a free trial at 7sReport.com.

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This Week’s Fed Decision Takeaway and Rate Hikes To Come, May 4, 2017

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The Fed made no changes to interest rates this week, as expected.

Fed Decision Takeaway

The Fed statement almost perfectly met our “Meets Expectations If” scenario, as the Fed acknowledged the slight loss of economic momentum since March, but stated it viewed the slowing as only temporary, and left the door firmly open for a rate hike in June.

Looking specifically at the statement, the Fed said yesterday that economic activity had “slowed” compared to “expanded at a moderate pace” in March. But, in the second paragraph, the Fed said the loss of economic momentum appears to be “transitory,” and signaled the recent underwhelming data won’t make the Fed deviate from future rate hikes.

Underscoring that point was the fact that the Fed said risks to the near-term economic outlook continue to be “roughly balanced,” which is Fed speak for “we can hike rates at any meeting going forward.” Bottom line, the Fed was not spooked by the recent soft data and it is not deterring them from any future rate hikes… yet.

From a market standpoint, there was a mild “hawkish” reaction, not so much because the statement was hawkish, but instead because there was nothing dovish in the statement. That’s what markets have become conditioned to expect. The Dollar Index drifted to the highs of the day 30 minutes after the statement while the 30-year Treasury erased small gains and closed fractionally lower. Stocks drifted slightly lower, but selling was mild. Overall, the Fed statement was not a market mover.

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