The Day Ahead: Hunting a Fat-Elephant Jobs Number

 | Mar 06, 2013 | 8:30 AM EST
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Where was I when the Dow hit its record? Rocking a fifth set of perfect pull-ups in the doorway. Where were you? Tweet @BrianSozzi with your answer, hashtag #DowMemories, because hey -- we are supposed to remember the day forever and ever!

But let's move on to real important things. What I want to draw attention to is the stronger-than-average probability for a bam or wow February employment report. Estimates, before the ADP numbers, are for 150,000 to 180,000 in non-farm payroll gains. These could be pushed higher if the ADP numbers continue their optimistic trend. This would lessen the bam potential of the government report, but not rule it out entirely.

The market's reaction to a bam report is a dart-throw. I am inclined to say it's bullish for stocks in the very near term. After all, in his congressional testimony, Fed chief Bernanke reminded us that the labor market "remains generally weak" and that the pigs are awash in euphoria. A 200,000-plus headline number may fall into the yummy zone for the market -- to the point at which it might justify rotating back into stocks, and out of 10-year U.S. Treasures. That's because this would mean quickening employment into the spring, but not quite substantial enough to trigger a hawk attack inside the Fed.

The flip side of the coin is that a 200,000 headline really represents a short-term employment peak, brought about by approaching sequester-related cuts. (You know, folks, there is multiplier effect here -- a furloughed airline employee may not need that cup of Starbucks (SBUX).) It would also represent a renewed weakening in U.S. retail sales, as has been the theme on retailer earnings calls. It would also mean softening economic growth in the European Union, which would spark fears the Fed is only spurring paper wealth.

Stalking 200,000

As for this notion of a 200,000 jobs headline, the predominant theme that may explain this possibility is the housing-market recovery. It's been acting as the leading positive protagonist in the employment sphere, which has then spread to other sectors, from manufacturing to retail. If you look at month-to-month changes in the data, something in interesting happened from January to February: sharp improvement in general business activity and, in most cases, employment. For the January reports I analyzed, the numbers were so robust that they implied employment momentum likely accelerated into February.

More specifically, existing-home sales edged up overall in January -- rising in every region except for the West -- and buying traffic is picking up, a trend that signals confidence in employment prospects. In addition, supply is at the lowest level since April 2005, which means people will have to be hired in order to build, build, build. As for new-home sales, the January report showed a "quickened sales pace" with strong sales revival across all regions. It also reflected the smallest of amount of supply since March 2005, similar to situation for existing homes.

Meanwhile, backlogs at Ryland (RYL), Toll Brothers (TOL) and Pulte (PHM) were between 57% and 65%, with a 20% figure at KB Home (KBH). Home Depot (HD), saw a promising trend change -- professional customer sales grew about as much as consumer sales did in the fourth quarter -- and Lowe's (LOW), professional services outperformed its average same-store sales.

Turning to broader-based economic data in February, the Conference Board reported higher rates of people saying jobs are "plentiful" in that month. New orders rose sharply in the Empire State manufacturing report; the figure was up significantly in the Institute for Supply Management manufacturing survey; and notched an 11-month high in the ISM-Chicago report.

Finally, while the Philadelphia Fed manufacturing index saw a negative headline, the employment component ticked up to a positive 0.9 vs. minus 5.2 in January, and the future employment index was up about 4 points from January to 14.9.

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