We get the February jobs report tomorrow.

Remember, the BLS numbers cover up to just the 12th of the prior month, so most of the DOGE job cuts thus far should show up on the next report, in early April.

That said, against the market expectations of 150k-160k jobs added and a 4.0% unemployment rate (both of which are right on the average of the past year), it sets up for a negative surprise.

And we’ve had some clues from the private jobs reports this week.

On Wednesday, the ADP report for February came in at 77k jobs added, about half of what was expected.

And this morning a report from the recruitment firm Challenger, Gray showed the biggest layoffs in February since the covid lockdown era, and the depths of the global financial crisis.

So, clearly a labor market shock is coming.

How much will come tomorrow?

If we look back at just the January report, of the 143k jobs added, 38k were government.  But then there was 22k added in “social assistance” and 44k added in healthcare.  Government directly funds about 70% of social assistance programs, and about half of national healthcare.

The rough math suggests at least half of the jobs added in January were government related.  So, for February, we add in a combination of some degree of government job cuts and a hiring freeze, and we should expect a number that undershoots the consensus view.

And remember, the Fed is highly sensitive to a deterioration in the labor market.  In fact, they’ve been telling us for the past year that signs of “cracks” would be a condition to “react” (i.e. rate cuts).

And as we’ve discussed in my daily notes, history suggests the Fed is more comfortable doing clean up and rescue, than proactive fine tuning.

So, they will wait until they see it.  And they may get a “crack” tomorrow, with a bigger chasm coming next month.

With that, the market has been stepping up bets on a May rate cut (now about a coin flips chance).  But they continue to underprice the probability of a cut at the March 19th meeting — especially given the deteriorating stock market.

With that, we go into tomorrow’s job number with the S&P having already broken this very significant trendline that represents the anticipation of a Fed easing cycle. 

And the Nasdaq looks likely to test this big trendline we’ve been watching, which was induced by the “ChatGPT moment.”

A test of this line would represent a 12% correction in the Nasdaq.

What would be a relief valve for stocks?  A Fed “reaction” to cracks in the job market.  If not a March cut, then at least communication to markets that they are ready to act, to do more, and earlier than the market has priced in.