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Will Employment Report "Seal the Deal" on Fed rate Hike Next Week

Friday, March 8, 2017

Today's Spotlight Market

Trader's in Fed Funds futures are expecting the Federal Reserve to raise interest rates next week with the March 2017 Fed Funds futures contract currently pricing-in a 88.6% probability of a 25 basis point increase following the Federal Open Market Committee meeting that ends on Wednesday. Looking forward out to the end of 2017, the December 2017 is currently pricing-in a total of 3 interest rate hikes by the Fed this year.

Fundamentals

While market participants appear to believe that the Federal Reserve will raise short-term interests by 0.25% at the 2-day Federal Open Market Committee (FOMC) meeting scheduled to end on March 15, Fed officials will still have one more major economic report to digest this morning with the release of non-farm payrolls data for February. While the average consensus of analysts' is for a gain of about 190,000 jobs, some traders are looking for a much stronger employment number following the rather strong 298,000 private sector job growth figure reported by payrolls processor ADP in its monthly National Employment Report. Even more impressive in ADP's data was that all the major employment sectors posted job gains including a 32,000 job increase in the widely watched manufacturing sector. Traders are looking for the unemployment rate to fall by 0.1% to 4.7% although a small uptick would not be a huge surprise if we also see the labor force participation rate tick upward. This would indicate more potential workers entering the labor force as the employment picture continues to improve. Also of note will be the reported increase in average hourly earnings, which are expected to have increase by a modest 0.2% in February. This data is particularly important for FOMC voting members as an indicator of any wage inflation due to a tightening labor market. Interest rate futures have been in a downward trend the past several trading session with the lead month June 10-year Note futures trading just above the most recent major low made back in December of last year when the Fed last raised short-term interest rates.

Technical Notes

Looking at the daily continuation chart for 10-year Note futures, we notice prices trend lower towards the lower portion of the consolidation pattern that begin in December of last year. Prices are now well below both the 20 and 200-day moving averages and momentum as measured by the 14-day RSI continues to weaken but is still holding just above oversold levels with a current reading of 32.93. Chart support is seen at the December 15 low of 122-14.5, with resistance found at the recent high of 125-20.5 made back on February 27.

Mike Zarembski, Senior Commodity Analyst