Video length: 00:07:56

The key issue surrounding today’s February US Nonfarm Payrolls report is whether or not the US labor market will give further indication that it is strong enough to justify three rate hikes during the rest of 2017. With Fed funds futures contracts already pricing in a 100% chance of a rate hike when the FOMC meets on Wednesday, March 15, today’s data is more or less a ‘cherry on top’ of rate hike expectations. Instead, market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed’s defintion of “full employment” (at 5% or lower) since for October 2015.

Current expectations for today’s data are undoubtedly among the strongest they’ve been in years, with the unemployment rate expected to drop from 4.9% to 4.7%, and the headline jobs figure to come in at +200K. Wage growth is due in around +2.7% y/y, slightly off of the +2.8% figure seen in December 2016, which was a seven-year high.

The aggregate forecast heading into this report has jumped higher the past few days. Wednesday’s February US ADP Employment report showed +298K new jobs created last month, easily beating expectations of an increase of +185K. Likewise, the February US ISM Services/Non-Manufacturing index increased to 57.7 (from 56.5 previously). Using a 10-year rolling model, the ADP report and the ISM Services report can account for 92% of the changes in the NFP figure (R^2 = 0.92). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth north of +250K. Needless to say, expectations are quite high.

With respect to the NFP report on Friday, so long as it comes in above +100K, the jobs data will merely be the ‘cherry on top’ of the March rate hike ‘cake’ that Fed Chair Janet Yellen (among other Fed policymakers) put the ‘icing’ on last week. As the Atlanta Fed Jobs Calculator shows, for the US economy to maintain its current 4.9% unemployment rate (U3) through the end of 2017, no more than +108K jobs need to be added per month.