(SevensReport.com) 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.
“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: A strong dollar rally/bond sell-off (the 10-year yield should rally back above 2.40% on this number) with potentially steep drops in stocks/commodities, as surging interest rates would likely begin to offset growth expectations.
“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: A knee-jerk stock rally most likely, and if the number prints in the high 100’s I wouldn’t be surprised to see the S&P 500 make a run at 2400. If the number prints at the higher end of the range in wages, though, we could see the dollar rally and bonds/commodities drop, and that could put the breaks on any rally in stocks. This is the most positive outcome for stocks.
“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: Bonds and gold should surge and the 10-year Treasury yield would almost certainly trade back into the mid 2.20% range. Stocks would likely drop on this soft number and we could see a decent retracement of the last two week’s rally. Commodities also would surge (especially gold) and the dollar would break below the recent lows near 98.70ish.
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