The most eagerly awaited Employment Situation report since, well, last month’s, is out tomorrow. A strong report may send the markets higher, until equity traders get nervous that this lets the Fed out of their self-created box. A disappointment could light a match under the bond market.
The April Fools joke is that the headline number – good or bad – is likely to be terribly misleading. It behooves both equity and bond traders to drill down beneath the headline number, read the asterisks and dissect all of the BLS footnotes. Here’s why:
· Striking California grocery workers return to work: As many as 72,000, and as few as 10,000 workers will have returned to the payrolls last month. Let’s assume the median number of 41k+ due to the strike’s settlement. This may make the number look better than it actually is;
· Seasonal adjustments: BLS performs a seasonal calculation based upon year over year hires each month. All seasonal hires this month (think Tax prep and Construction work) get compared to March 2003. The 10-year average for March was a +763k; Previous adjustments of this have been as much as 500k+. This could theoretically undercount jobs by a significant amount.
· Weather based factors: This may impact the seasonal adjustment. The unseasonably cold weather in March may have negatively impacted job creation, particularly in the construction, garden, and travel sectors, making the data look worse than it is;
· Net Birth Bias Adjustment: Last year, BLS replaced a “bias adjustment” with a “net new birth adjustment.” This was designed to more accurately capture “job creation at businesses that elude the BLS’ sampling radar.” This should (in theory) help find seasonal patterns of new business formation. According to Deutsche Bank, January’s net new birth adjustment was -321k, and February’s was +72k. For March should be similar to February, so we should expect a -177k for the quarter. But Deutsche Bank notes “that seems way too low relative to history because the bias adjustment was always positive.”
Confused yet? Consider this: Chicago PMI’s employment component was weaker than expected, while the ISM’s employment component was stronger than expected.
Bottom line: Traders should avoid a knee jerk reaction to the headline number; Very possibly, the detailed data beyond the headline may tell the true story.