What are the arguments for a strong February employment report?
1) Financial conditions have eased dramatically since the December FOMC meeting, with the S&P 500 at all-time highs and very tight IG and HY spreads. Significant wealth effects and lower borrowing costs are a major tailwind to consumer spending and capex spending, see the first and second charts.
2) Jobless claims remain very low, around 200,000, and the economy remains surprisingly resilient, with households and firms having locked in lower interest rates during Covid, see the third and fourth charts.
3) The fiscal deficit is running at a high 6% of GDP for an expansion, driven by the CHIPS Act, IRA, and Infrastructure Act, and associated positive effects on manufacturing construction, energy investments, and infrastructure investments.
4) The employment-to-population ratio is almost a full percentage point lower than pre-Covid, and immigration continues to be strong, suggesting there is still more upside potential to employment.
Source: Bloomberg, Apollo Chief EconomistSource: Bloomberg SHOK, Apollo Chief Economist. Note: $20 oil price decline, 60 bps tighter IG spreads, one standard deviation decline in VIX, and 100 bps lower rates via changed Fed forward guidance.Source: University of Michigan, Haver Analytics, Apollo Chief EconomistSource: The Conference Board, Haver, Apollo Chief Economist
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