By Sinéad Carew
NEW YORK (Reuters) - Wall Street will be watching next week's economic data with a laser focus after a dismal February jobs report and recessionary warning signals from U.S. Treasury yields.
After the longest U.S. government shutdown on record, bad weather and a late 2018 equities sell-off muddied market participants' view on the U.S. economy in recent months, they are hoping for a clearer view from upcoming data.
Investors have been anxious for reassurance since U.S. Treasury 10-year note yields last Friday fell below three-month Treasury bill yields for the first time since 2007.
The S&P fell almost 2 percent that day as yield curve inversions are widely viewed as recessionary indicators and this one occurred two days after the U.S. Federal Reserve pulled back on expected rate hikes amid signs of slowing economic growth.
"Investors are going to be hyper-sensitive to data," said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago. "The yield curve inversion is the manifestation of investors' fears that the U.S. is getting caught up in a global slowdown."
Many investors say they do not expect a U.S. recession any time soon. But they are seeking confirmation for this optimism in next week's data, which includes retail sales, manufacturing activity, durable goods orders and non-farm payrolls.
Reports that meet or beat expectations "would suggest the soft patch we entered the year with is temporary" and would confirm economic projections for 2019, said Russell Price, chief economist at Ameriprise Financial (NYSE:AMP) in Troy, Michigan.
February's U.S. retail sales data, due on Monday, and the March jobs report, scheduled for Friday, may be the most closely watched indicators as economists want reassurance on the spending power and confidence of U.S. consumers, which represent about 70 percent of the U.S. economy.
U.S. non-farm payroll growth almost stalled in February, with only 20,000 jobs created. Economists polled by Reuters last expected an average of 170,000 new jobs for March.
January retail sales rose a modest 0.2 percent after a December decline, but were not seen as strong enough to alter slowing U.S. economic momentum. Economists, on average, expect a February increase of 0.3 percent.
"If we were to witness a faltering of the U.S consumer, that would be very difficult for markets, which are relying on the U.S. consumer to propel the cycle through at least another year," said Frances Donald, head of macroeconomic strategy at Manulife in Toronto.
Graphic: Jobs rebound sharply in month following last two slowdowns - https://tmsnrt.rs/2HNQePZ
But Donald expects a rebound in both retail sales and jobs, since the last reports were weakened by the December-January government shutdown. She will also watch durable goods data, due on Tuesday, for a view on corporate capital spending.
"I have less conviction capex will take off markedly, but if we do see an improvement, that would be a substantial surprise," said Donald.
Strong capex would also surprise TD Ameritrade Chief Market Strategist JJ Kinahan, who says companies have stalled spending as they await the outcome of U.S.-China trade talks.
Kinahan says U.S.-China tensions could mute market reactions to data "unless it's so far off to the upside or the downside." The two countries are due to negotiate in Washington, D.C., next week after what Treasury Secretary Steven Mnuchin said were "constructive" talks in Beijing this week.
Options contracts on the S&P 500 Index and its tracking fund, the SPDR S&P 500 ETF Trust (AX:SPY), show a modest uptick in the volatility priced into contracts expiring next Friday, compared with other near-term expirations.
“We should expect more volatile days,” said Kate Warne, investment strategist at Edward Jones in St. Louis. “Probably the job numbers will be the biggest focus, partly because of February’s miss and partly due to the overall concerns about slower growth."
Manufacturing data will also be under close scrutiny on Monday after weak U.S. and German March data last Friday, according to Cresset's Ablin.
While Ameriprise's Price is expecting solid data, he cautions: "The market has more downside risk than upside risk primarily because of the yield inversion, the concern over the tone of economic data over the past few months, not just in the United States, but around the world."