It’s jobs week in America.
On Friday, March 10, the Bureau of Labor Statistics will release the February jobs report, which is expected to seal the deal for a Federal Reserve rate hike later this month.
In February, economists expect the unemployment rate fell to 4.7% while nonfarm payrolls grew by 190,000.
Fed Chair Janet Yellen last Friday gave her stamp of approval on a March rate hike, which traders had increased their bets on during the week, saying in a speech given in Chicago that, “we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.”
Elsewhere in that speech, Yellen said 2017 will likely see a more aggressive timetable for raising rates from the Fed than 2015 and 2016, when the central bank raised interest rates just once each year.
Yellen’s comments followed New York Fed president Bill Dudley and Fed governor Lael Brainard — who along with Fed Vice Chair Stanley Fischer and Yellen are seen as the four most influential policymakers on the FOMC — who earlier this week tipped markets towards betting on action at the Fed’s March 14-15 meeting.
In markets this week, investors will be contending with stocks trading just below fresh records after Wednesday saw the biggest inflows into the SPY ETF since 2014 as U.S equities had their best day of the year.
Snap Inc. (SNAP), parent company of the ephemeral messaging app Snapchat, will also be in focus as its early trading days unfold. After its initial public offering was priced at $17 per share, the stock gained 44% in its debut on Thursday, settling at $24.48 per share. On Friday, the stock added an additional 10% to close at $27.09. The company now has a market cap of $31 billion.
Snap, which was not profitable in 2016, had some observers arguing that a new tech bubble is upon us. Considering, however, that Snap is the first tech IPO of 2017 and the first tech IPO to have the attention of markets and the public since Alibaba’s (BABA) debut in 2014, it seems more likely that the scars of the 2000 tech bust run so deep we’re almost incapable of seeing any tech buzz as anything but an echo of that crash.
More concerning for markets, despite all of the chaos in Washington and the alleged mania brought out by the Snap debut, is that the Fed has begun raising rates.
As we highlighted this week, when the Fed begins raising rates, the seeds for the next recession and bear market have been sown. David Rosenberg at Gluskin Sheff noted that of the 13 rate-hike cycles we’ve had since World War II, just three did not end with the economy in recession.
This isn’t to say that the Fed itself is what causes a recession, but rather that the forces the Fed responds to when raising rates — inflation, loose financial conditions, tight labor markets — are what create the conditions for an eventual decline in economic growth.
In her speech on Friday, Fed Chair Janet Yellen spent considerable time talking about the U.S. economy’s neutral “real” Fed Funds rate, or the interest rate that, adjusted for inflation, is neither overly expansionary or contractionary.
Currently, the real Fed Funds rates is about -1%. Recent estimates have pegged the current neutral rate for the U.S. economy to be around 1%, meaning that the effective Fed Funds rate would, if inflation is running at 2% year-over-year, settle at 3%.
This framework would say, then, that if the Fed hits its 2% inflation goal and doesn’t overshoot there are nine more rate hikes in this current cycle. At a pace of three or four rate hikes per year, the middle of 2019 could mark this cycle’s end.
This is, of course, a highly conditional look at how the Fed’s future policy path could unfold and it’s likely things won’t actually go down this way. But when we talk about the Fed raising rates, the end of the current economic expansion, and a potential end to the post-crisis bull market, it’s worth at least nothing a sort of rough timetable along which things could unfold.
The reasons why this might not be the case, however, are many and obvious. Because we haven’t once mentioned Donald Trump.
- Monday: Factory orders, January (+1% expected; +1.3% previously)
- Tuesday: Trade balance, January (-$48 billion expected; -$44.3 billion previously); Consumer credit, January (+$17.2 billion expected; +$14.2 billion previously)
- Wednesday: ADP private payrolls, February (+185,000 expected; +246,000 previously); Nonfarm productivity, fourth quarter (+1.5% expected; +1.3% previously); Import prices, February (+0.1% expected; +0.4% previously)
- Thursday: Initial jobless claims (237,000 expected; 223,000 previously)
- Friday: Nonfarm payrolls, February (+190,000 expected; +227,000 previously); Unemployment rate, February (4.7% expected; 4.8% previously); Average hourly earnings, month-on-month (+0.3% expected; +0.1% previously); Average hourly earnings, year-on-year (+2.8% expected; +2.5% previously)
‘Forgotten Man,’ forgotten
Perhaps the most pervasive economic theme since Donald Trump’s election has been the increase in confidence among consumers and business owners. This has been reflected both in economic data and the persistence of the stock market, despite the seeming disorganization of the administration.
And, indeed, this week we saw The Conference Board’s latest reading on consumer confidence rise again to its highest level in 15 years.
But inside this report, analysts at Bespoke Investment Group noted that consumers at the lowest income levels became notably less confident in February.
“For consumers with incomes below $35K, however, confidence levels dropped sharply, falling from 78.6 down to 58.4,” Bespoke wrote in a note on Tuesday. “That 20-point decline was the largest one-month drop in two years and the fourth largest on record (going back to 1967).”
After the election, confidence among all consumers rose, but those at the lowest-end of the wage scale saw an outsized increase in confidence. And as Bespoke writes, “President Trump campaigned on a policy of reviving the ‘forgotten’ middle class of the country and to a lesser extent lower income Americans. At the same time, he said his Presidency wouldn’t be an Administration that would benefit only the rich of the country.”
But as this data shows there’s been, at least temporarily, a loss of confidence among those consumers Trump promised not to leave behind.
Yahoo Finance’s Rick Newman wrote after the initial post-election stock market jump that the Trump era had already been great for elites. And this has continued to be the case.
Meanwhile, Trump’s signature economic plans of cutting taxes, repealing and replacing Obamacare, and making significant investments in infrastructure still remain not much more than outlines. This week, Trump said in a speech before a joint session of Congress that there remained 94 million Americans not in the labor force. This is a true, but highly misleading number.
But as Rick outlined in a post this week, there are about 16 million Americans underemployed or unemployed and looking for work. And there may be as many as 10 million men so demoralized by their job prospects that they are not working at all.
These 26 million Americans are the “forgotten men” of the U.S. economy that Trump said would be forgotten no longer. And early data indicates these are the folks beginning to feel less confident about their prospects already.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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