KEY DATA: ADP: +214,000; HWOL: -162,100

IN A NUTSHELL: “It looks like the labor market is still tightening, though the softening in online want ads is a cautionary sign.”

WHAT IT MEANS: Friday we get the February employment report and with signs showing the economy is once again growing decently, the labor market is again the key factor in any future rate hikes. So, what might the jobs report look like? If the ADP estimate of private sector payroll gains is any guide, last month’s payroll increase should be a lot better than the 151,000 increase we saw in January. The ADP report showed that job increases were pretty evenly spread across all sizes of companies. They were also fairly even increases across industries. The services sector led the way, but there were a lot of new positions added in construction. The only weak link was, not surprisingly, manufacturing, which posted a decline in payrolls. Yesterday’s Institute for Supply Management’s manufacturing report showed the sector to be stabilizing, so there may not be many jobs cuts in the sector.

Whether job growth will accelerate was brought into question by the Conference Board’s February Help Wanted OnLine index, which fell sharply. The upward momentum seems to have been stunted over the past few months. Why that is happening is unclear. It could be that the economy is slowing, which seems to be the logical conclusion. The other may be that firms have not been able to fill so many of the jobs they already have open that they are cutting back on their advertising. Regardless, the softening is something to watch.

The Fed’s so-called Beige Book was released today. This contains discussions about economic activity in the nation and in each of the Fed Districts. Economic activity expanded in most districts and the labor market was decent, with wage gains strong in many areas. However, manufacturing, as we are seeing in most measures, was soft. The Fed members have done little to signal that the next rate hike is coming anytime soon, so we can be reasonably comfortable that there will not be any surprise at the end of the March 15-16 meeting.

MARKETS AND FED POLICY IMPLICATIONS: The jobs report could be crucial in setting the tone of the FOMC’s statement in two weeks. A strong one where wage growth is solid again, could provide the cover for the members to warn that another rate hike may be in the works. I expect payrolls to increase by about 225,000. That would be enough to make the argument that the labor market is still tightening. If it were followed by an even better March report, which comes out before the April 26-27 FOMC meeting, especially if the unemployment rate falls again, then it would hard to imagine the Committee not considering a rate hike. The problems the FOMC members worried about, including declining equity markets and continued weakness in oil, seem to have dissipated. World economic weakness persists, but it is not any worse than in December when rates were increased. And it appears that investors are beginning to recognize that the reports of a recession on the horizon were not much different than the fears about Mark Twain’s death – somewhat premature. As long as oil prices remain stable or slowly increase, the equity markets should be able to accept the reality of a decent economy and higher future rates. But I never underestimate the ability of investors to react in ways that you never expect.