David Joy: February jobs report hints at winter's drag on the economy

The February jobs report was just strong enough to bolster the case that severe winter weather has, indeed, been the primary culprit in the recent series of softer economic data, yet not so robust as to be conclusive. The reported creation of 175,000 new non-farm jobs was better than the 150,000 that was expected. And the January total was revised higher by 16,000 to 129,000.

Yet, while the increase was welcome news, and appreciably better than the 107,000 average of December and January, it still fell well short of the 255,000 jobs created on average in October and November.

That is not to say we won’t get there. As the Bureau of Labor Statistics noted in its release, “…severe winter weather occurred in much of the country during the February reference period for the establishment and household surveys.” And still the report was fairly strong, which sets up the possibility that a presumably less weather impacted March report might be stronger still.

The employment report was also sufficiently strong to suggest that the Federal Reserve will decide to reduce the pace of quantitative easing for the third straight time when it meets on March 18-19, despite the fact that the unemployment rate itself rose one-tenth to 6.7%.

Bonds, stocks react
The bond market reacted sharply to the report. The yield on the ten-year Treasury note rose five basis points to 2.79% after the report last Friday, its highest yield since Jan. 22.

The move followed an even stronger reaction to easing tensions in Ukraine earlier in the week, when the yield spiked ten basis points to 2.70% on Tuesday. Coupled with a smaller rise in below-investment grade corporate bond yields, the spread between government bonds and the BofA/Merrill Lynch High index tightened to a new cyclical low of 378 basis points, its lowest level since the fourth quarter of 2007, just before the recession began. By comparison, one year ago the spread was 480 basis points, and the ten year low of 241 basis points occurred in the second quarter of 2007.

U.S. equities rebounded last week in the absence of further tension in Ukraine and in response to the better data. The S&P 500 added another 1.0% to end the week at a new closing high of 1878, bringing its return on the year to 1.6%, now ahead of the Barclays U.S. Aggregate Bond index, which lost 0.6% on the week, leaving its year-to-date gain at 1.4%.

Stocks in Europe were not as fortunate. The Stoxx Europe 600 index lost 1.5% for the week, with Germany falling 3.6%. The losses for dollar-based investors was somewhat better after the euro rose sharply following the ECB’s decision last Thursday to provide no further stimulus. The Russian Micex index lost 7.3% on top of the prior week’s 2.9% decline.

This week’s light economic calendar will do little to resolve the weather question. February retail sales are expected to be firmer than January’s, but impacted nevertheless. The March preliminary consumer confidence report from the University of Michigan is also expected to have firmed modestly, as are producer prices in February. And, of course, the situation in Ukraine remains far from resolved. This week leads up to Sunday’s referendum over whether to separate Crimea from Ukraine, the legitimacy of which is recognized neither by the new government in Kiev nor the international community.

Stocks in the U.S. look poised to move somewhat higher, along with bond yields, if the economic data improves along with the weather and the geopolitical outlook does not deteriorate. In fact, corporate earnings expectations of 8-10% growth are dependent upon an acceleration of growth toward 3.0%. While we may not achieve that pace in the first quarter, some of the lost output should be recaptured in the second. Without such faster growth, stock valuations and credit spreads will begin to look increasingly stretched.

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