This Is How We'll Really Know If The Jobs Report Is Good

Expectations are for the report to show nonfarm payrolls in the US grew by 240,000 in December while the unemployment rate fell to 5.7%. 

In a note ahead of the report, Citi's Steven Englander says the real strength of Friday's report won't be found in what we learn about December, but in the revisions to the November and October reports.

Last month, payrolls grew by 321,000, which blew away expectations.

But as Englander notes, the market, "is likely to be shocked if NFP comes out above 250k, accompanied by 40k or more upward surprises. On the downside below 200k and a big slice revised out of last month's 321k would be the downside shocker."

Englander argues that investors might well enough understand that any one month's report can be influenced by aberrations in the data. So on Friday, it will be the surprises from past months that will "likely reflect more fundamental forces," Englander writes. 

The big number to watch on Friday is 200,000, as December will look to be the 11th straight month of payrolls gains over this level, extending the current streak which is the longest since 1995.

With the price of oil still crashing and stocks getting slammed before bouncing back violently to start 2015, the latest jobs report seems to have kind of snuck up on the market. Add in the Christmas and New Year holidays, and you've got the ingredients of a market that in some sense almost forgot this was Jobs Week.

In his note, Englander jokes that he's only had one conversation about the jobs report this week, and that conversation was with himself. 

Looking again at what matters most in this report, the headline gains in employment are encouraging for policymakers and the Federal Reserve, but what the Fed really wants to see is wage growth.

In November, average hourly earnings rose 0.4%. And while expectations are for average hourly earnings to fall back to 0.2%, Englander says the real market risk on Friday is posed by another month of 0.3% or 0.4% wage growth, as this would represent a 0.7% or 0.8% increase over a two-month period, which we haven't seen since 2008. 

Englander also notes that a further decrease in the unemployment rate, particularly a move down to 5.6%, "is getting dangerously close to a full employment level that the FOMC does not want to see with zero rates" but adds that, "it does not seem that investors as a group share these fears."

Earlier this week, the Minutes from December's FOMC meeting indicated that the Fed is unlikely to raise rates before its April meeting. But an increase in wages could put pressure on the Fed to raise rates in spite of the market's seeming trust that we are on hold until April.