Employment Recap; Central Bank Policy; International Action

Wow, talk about a jam-packed week! On the heels of a solid employment report on Friday, this week, the market braces for a series of central bank decisions due from the Fed, BOJ, BOE and SNB. Theresa May is also likely to trigger Article 50, Dutch elections are scheduled to take place, the U.S. debt ceiling limit expires and G20 finance ministers will hold a gathering in Germany.

On Friday last week, nonfarm payrolls rose 235k in February, a five-month high. Coupled with an upward revision to the January report from 227k to 238k, the six month average, however, rose minimally from 192k to 194k and the twelve-month average was little changed from 195k to 196k.

In the details, goods-producing payrolls jumped 95k in the second month of the new year, thanks to a 58k gain in construction payrolls, the highest gain since February 2006 – no doubt buoyed by warmer than expected weather across much of the U.S. – and to a lesser extent, a 28k rise in manufacturing payrolls, a thirteen-month high. Service producing payrolls rose 132k in February, down from 167k added in January.

The civilian labor force increased by nearly 350k in February, however, household employment improved by that and more, up almost 450k. As a result, the participation rate gained one-tenth of a percentage point to 63.0% and the unemployment rate fell by one-tenth from 4.8% to 4.7%, a two-month low.

Additionally, wages increased 0.2% in February, raising the annual pace to 2.8% after last month’s weakness was partially revised away. January wage growth was revised up from 2.5% to 2.6%, however, Friday’s report suggests the decline in momentum at the start of the year may have been only a temporary setback. Still far from robust, improved wage growth will make many Fed officials much more comfortable with continuing to remove accommodation.

Bottom Line: On Wednesday, the Fed is almost certainly expected to hike rates from 0.75% to 1.00%. But what about after March? The market will be spilling over the details of the statement, looking for any indication or hints as to the Committee's expectation for the next round of policy adjustment. At this point, multiple rate hikes are expected in the remaining nine months of the year. The upcoming March statement, however, is unlikely to provide a road map for future policy moves.

The BOJ, on the other hand, is widely expected to stand pat Thursday, keeping 10-year government bond yields at 0.0%, and the rate on commercial bank reserves at -0.1%. Furthermore, the Japanese central bank is likely to reiterate a commitment to continuing its bond buying program, although potentially at a reduced annual pace from the initial amount of almost 80 trillion yen ($696.62 billion) initiated in 2014. A reduced purchase of 66 trillion ($575 billion) in March puts the asset-purchase plan on track to miss the annual target, leaving investors to question whether the BOJ was in fact initiating tapering already. Rather, the reduced purchase level more likely highlights the struggle Governor Haruhiko Kuroda faces while focusing on controlling the yield curve amid concerns over the sustainability of its bond purchases after it has bought up nearly 40% of the nation’s outstanding government debt. 

On Thursday, the BOE is expected to hold rates steady. Inflation and growth are picking up in the U.K., but Brexit headwinds are still strong creating quite a dilemma for policymakers. The market will be attempting to read the monetary policy tea leaves based on individual votes particularly that of Governor Mark Carney and whether or not he sees staying pat is the best course of action. 

No change is expected at the SNB, the same day the BOE will make its policy announcement. 

In the U.K., lawmakers vote today on a bill authorizing the British Prime Minister Theresa May to trigger Brexit, potentially as early as tomorrow. A small number of opposition, however, less than confident (or supportive) that the vote will pass, are expected to try and secure amendments to the legislation if they fail. According to reports, May has suggested a plan to quit the EU "with no accord rather than a bad one." Further complicating issues at the moment, Scotland's First Minister Nicola Sturgeon said she'll seek authority for another referendum on independence. The sterling is trading higher against the dollar as Britain presumably starts to prepare for Brexit, up 0.42%, currently trading at $1.22 against the dollar as of 9:25am ET. 

Oil prices are down again, dropping below $48 in overnight trading as the U.S. oil rig count rose by 8 to 617 last week, the highest level since September 2015. Crude is currently down 0.21%, trading at $48.39 a barrel as of 9:26am ET. Investors have been backing off more bullish bets on oil as prices sank below $50 a barrel four days ago, with analysts suggesting things could get worse from here. 

The Federal Reserve board overseeing Puerto Rico's finances will meet today in New York. The board must decide on a plan for ending the island’s chronic deficits and restructuring the current debt level of more than $110B. Last week, the board told Governor Ricardo A. Rossello his proposal was unrealistic and asked him to make sizable revisions.

-Lindsey Piegza, Ph.D., Chief Economist