Daily Market Color

Strong Payrolls Report Boosts Case for Fed Tightening in 2016

US Stocks rallied while Treasuries sold off across the curve after an upbeat February payrolls report boosted bullish bets on the US economy.  The headline number showed US employers added 242,000 workers last month, rebounding from a drop in January and easily beating the 195,000 economists were expecting.  December and January’s numbers were revised up a combined 30,000 jobs and the unemployment rate held steady at an eight-year low of 4.9%, even as more people entered the labor market.  The one thing missing from the report was a pickup in wage growth.  Average hourly earnings actually fell 0.1%, the first drop since December 2014, after surging 0.5% in January.  One theory behind the fall in wages is a quirk in the calendar.  Worker pay tends to appear weaker during months when the survey week doesn’t include the 15th, a common payday for many workers.  Another reason for the fall is employment grew in lower-paying industries such as retail and hospitality, while payrolls declined in higher-income sectors such as mining and energy.  Regardless, with labor market slack continuing to be absorbed, wage growth is expected to pick up.  The futures market indicates a March rate hike is still off the table, but projections for later in the year continue to rise.

Outside the US, emerging markets extended their best week since October off the back of speculation that China will unveil new stimulus measures at this weekend’s National People’s Congress.  Chinese leaders will meet Saturday for an annual meeting to discuss growth targets as the world’s second largest company deals with the pains of transitioning to a more service-oriented economy.  Moody’s recently lowered China’s credit-rating outlook to negative from stable, adding to pressure on the Chinese government to announce effective reforms.

All three major US stock indexes are up just under 0.5%, while Treasury yields and swap rates are 3-7 bps higher across all major maturities.  Dallas Fed President Kaplan speaks this afternoon.

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