The stage is set for yet another critically important employment report this Friday. The market dodged the first major bullet of the week with an acceptable print from ADP that showed the private sector adding 175,000 jobs versus a 185,000 expectation, while last month’s figures were revised higher to 238,000. Recently the market has ignored good data points, instead choosing to emphasize weaker prints that play into the fears of slowing global growth, either due to EM volatility or because the DM is showing weakness. Our thoughts remain that the risk off trade has overreacted given the data and fundamentals that we think continue to show growth in the developed market that should put the spotlight on the Fed’s first tightening move during 1H:15. However, we hold no illusions that recent volatility will continue, although a few stable data points will at least allow a less emotional reaction to the far reaching influences that have brought yields and equity indices back to October levels.
The current consensus for Friday’s NFP report is in the 182,000 range, with a whisper building a little room for a small miss. Given December’s weather influenced print, the market will look for a reversal that supports the widely held view that employment trends remain supportive of expansionary economic activities. We would highlight that while January was as cold and snowy as December, there was actually fairly warm weather during the survey week. The annual revision of the survey also occurs this Friday, making interpretation of the number that much more difficult.
Despite the flight to quality trade over the past several weeks, corporates and high yield have responded constructively, with IG spreads only seven bps wider and high yield averages back to the levels at which they started the year. Earnings are half way through and we think reports are decent, even with questions over the quality of earnings. 1Q:14 comps are fairly easy in the 4% range, versus the 8% year-over-year growth that current earnings are trending towards. Read the full commentary now.