(Bloomberg) -- The U.S. jobs reports so far this year have given investors plenty to chew on: Unexpectedly strong wage growth one month, both blowout and disappointing payroll gains, and a stagnant unemployment rate. Here are four questions hanging over April figures due Friday from the Labor Department, and how financial markets may react:
1. Will payrolls bounce back after a weak March?
Economists are expecting the April report to show a rebound in nonfarm payrolls growth to 193,000 jobs -- in line with the average over the past 12 months -- following a surprisingly weak reading of 103,000 the previous month. Some of the pickup may reflect more favorable weather than a month earlier. The ADP Research Institute reported Wednesday that 204,000 private-sector jobs were added in April, while figures on Thursday showed weekly filings for unemployment benefits near the lowest level in almost a half-century.
Federal Reserve policy makers indicated in their post-meeting statement Wednesday that they see March’s figure as a blip, saying that job gains “have been strong, on average, in recent months.”
Should April job gains meet projections, that would likely bolster traders’ expectations that the central bank will move forward with its plans to gradually raise interest rates. Markets are pricing in slightly more than two additional quarter-point hikes by year-end, compared with policy makers’ current median projection for two more moves in 2018. If the data spark speculation that the central bank will have to move faster, stocks could break lower from the range they’ve been in since late March.
2. Will the jobless rate finally decline again?
For the last two reports, economists had forecast a decline in the unemployment rate, and both times it held at 4.1 percent -- still the lowest since 2000. Six straight months at 4.1 percent mark the longest steady streak since the late 1960s, when it stalled at 3.4 percent, before almost doubling by the end of 1970.
Analysts are more confident than in prior months that the rate will tick down to 4 percent. Signs are pointing to a tightening labor market: a steady flow of added positions, fewer layoffs, and companies desperate to hire amid robust demand for goods and services.
With the Fed judging full employment as consistent with a 4.5 percent jobless rate, an even-lower level would be seen by traders as encouraging continued rate hikes. Shorter-term interest rates would likely rise as a result. Already, the yields on two-year and five-year Treasuries are near the highest levels since the financial crisis.
3. Will wage gains break out of their gradual pace?
Pity the market if wages outpace forecasts. Just look at what happened earlier this year: When average hourly earnings in January jumped the most since the recession -- a figure later revised downward -- U.S. stocks tumbled into the first correction in two years and Treasury yields rose as investors feared the Fed would raise interest rates more aggressively to contain inflation.
Workers have been patiently waiting for bigger pay gains, with figures possibly depressed by the fact that more Americans are being lured off the sidelines and into the labor market. Economists, however, project an annual gain of 2.7 percent, the same as in March, and a monthly wage increase of 0.2 percent, a touch below the prior month’s 0.3 percent. Nonetheless, analysts still expect a gradual advance in coming months as labor slack continues to diminish.
“If they go to 3 percent or higher, I think that’s a pretty big negative shock and you could see a large selloff in the stock market -- maybe 2 percent or more in a day,” said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, which manages $2.5 billion.
Wage growth could also push longer-term rates above key levels from the past several years. The benchmark 10-year Treasury yield rose above 3 percent last month, but failed to break its intraday high set in 2014. On the other hand, a below-forecast wage figure could flatten the Treasury curve further as traders discount any price pressures on the economy.
4. What impact are tariffs and other headwinds having?
The report will also show which sectors have added or cut positions since President Donald Trump imposed tariffs on steel and aluminum imports from some countries. Watch the figures on jobs in fabricated metal products and primary metals. Another focus will be payrolls in transportation and warehousing, as new regulations and a shortage of truckers have aggravated delivery delays. In the ADP report Wednesday, goods-producing industries, which include manufacturers and builders, added the fewest workers in six months.
Traders will be watching for any clues on how the tariffs are starting to reverberate in the economy. The dollar, for instance, is the reserve currency of the world, and has haven characteristics, so it could rally amid global turmoil. But in the long run, protectionist policies would likely weaken the greenback and raise the specter of stagflation. That could spur rises in yields on 10- and 30-year Treasuries.
What Our Economists SayThe April jobs report will confirm that the March results were a fluke, and not a signal of an emerging soft patch. Recall that March payrolls have shown a tendency to underperform relative to trend. Conversely, the April bias favors a rebound. Bloomberg Economics projects an above-consensus outcome for April net hiring and further expects the pace of job creation to build momentum throughout the first half of the year amid the backdrop of accelerating economic growth.
-- Carl Riccadonna and Niraj Shah, Bloomberg Economics
©2018 Bloomberg L.P.