After Jobs Report, Financials Could Lead Markets Higher

 | Mar 10, 2017 | 9:20 AM EST
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This morning, the Bureau of Labor Statistics published the February Employment Report -- one of the last few indicators economists, market watchers and the Fed will get ahead of next week's Federal Open Market Committee (FOMC) meeting.

Over the last few weeks, we've seen rising expectations for a March rate hike, but more recently we've gotten conflicting signals in a variety of data points. This means today's employment report is being closely scrutinized, as we once again ask a recurring Fed question over the last two years: "will they or won't they?" So let's see how it did against expectations.

Nonfarm payrolls came in at 235,000, besting expectations for 190,000-200,000 depending on the source, and the unemployment rate held steady at 4.7%. A nice beat, but job growth slipped month over month compared to the 238,000 revised number of jobs created in January. Job gains were reported in construction, private educational services, manufacturing, health care and mining, which was offset by job losses in retail.

That was hardly surprising, given the ramped-up number of bricks and mortar location closings by companies ranging from Macy's (M) , Kohl's (KSS) , JC Penney (JCP) , hhgregg (HGGGQ) , Crocs (CROX) and many others. Given the relatively mild winter weather as well as the favorable housing stats of late, we are not shocked to see construction job growth leading the way in February. All in all, a good number that was ahead of expectations.

In looking at several other metrics in the report, the labor force participation ratio edged up a tick month over month to hit 63.0% in February, and we saw another sequential decline in the not in labor force category. In our view, those metrics are moving in the right direction.

The one item that is bound to catch the Fed's attention is wage growth, which rose even though hours worked remain unchanged in February vs. January. The report says: "In February, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $26.09, following a 5-cent increase in January."

While that wage growth likely reflects some impact from rising minimum wages, the mix shift in job creation toward higher-paying jobs in mining, construction and manufacturing and away from lower paying retail jobs was the primary driver. What's likely to catch the Fed's eye is the combined January-February wage growth, which equates to a 2.8% increase year over year -- the strongest we've seen in some time and better than the expected 2.7%.

In our view, this report helps pave the way for the Fed to nudge interest rates higher next week. We expect financials, including shares of banks such as Wells Fargo (WFC) , Bank of America (BAC) and Citigroup (C) , to name a few, to trade higher today and lead the market higher.

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