Uptick in Wages Complicates Fed Outlook

Both US stocks and Treasuries traded under pressure while the dollar rallied after this morning’s release of the January nonfarm payrolls report.  The report contained some mixed signals on the strength of the jobs market, but there were enough positive data points to keep the prospects of 2016 Fed rate hikes alive.  The headline payrolls number showed US employers added 151,000 workers last month, falling short of the 190,000 market consensus, and down from the lofty November and December results.  Markets largely ignored the headline miss, however, instead focusing on the underlying details.  More importantly, the unemployment rate dropped to 4.9%, the lowest level in nine years, while average hourly earnings rose 0.5% last month and 2.5% over earnings levels from a year ago.  Hours worked also increased, which should enhance the impact of higher wages on take-home cash/consumer spending potential.  The earnings report also gave hope for inflation’s return.  Yellen previously stated that the US economy needs to add around 100,000 jobs each month to keep pace with labor-force growth, so the 151,000 more than covers that and is consistent with an economy trending toward maximum employment. 

After the jobs report, traders adjusted their bets for the timing of the next interest rate hike.  Trading in Fed Funds futures indicate only a 12% chance of a hike in March, but the probability of a hike by the end of the year jumped from 20% to 50% after the report.  Expectations still remain far below where they were at the end of 2015, as Fed officials have continued to cite international headwinds and financial market volatility as factors that could delay the timing of future hikes.

U.S. Treasury and swap yields are up 1-2 basis points across the curve with the 10 year Treasury still near hovering near 12 month lows at 1.85%.  The dollar is slightly firmer on the day against most major currencies, while most commodity prices are down 1-2% on the day.