The Single Most Important Takeaway From Today's Jobs Report

 | Mar 10, 2017 | 9:17 AM EST
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Here are my quick thoughts on today's February non-farm payrolls report.

Headline job gains solid

The huge ADP number got us all ginned up for a big non-farm payrolls number. What we got was a perfectly fine number on its own: +235,000 with small upward revisions. But it just wasn't quite what people were whispering. The Bloomberg survey was +200,000, so today's number is really a small beat. Plus, considering the six-month average was 183,000, this is still a nice acceleration.

We can't realistically keep up this pace of job growth, but certainly if employers are feeling strongly enough about their business prospects to hire at even a slightly accelerated pace in the first half of 2017, it will erase any slack in the labor force quickly. This definitely has the Fed on alert.

Wages the most important element

This is probably the single most important part of this release, especially if you are concerned with what the Fed does in the coming months. Average hourly earnings (AHE) came in at +0.2% for the month, which, net of prior revisions, is right in line with expectations. The year-over-year is at +2.8%, tied for the highest pace since 2009.

In and of itself, those are pretty solid numbers. For context, AHE was running in the 3.0%-3.5% area just before the recession, so there is room for improvement. But it averaged just 1.9% from 2010-2014, so just getting to 3.0% is a big improvement.

Remember that last month wages missed pretty badly. Expectations were for AHE to come in at +0.3% month over month but they actually came in at +0.1%. It was a head-scratcher with jobs doing well that wages would decelerate. Now that they've been revised up a bit, it turns out the apparent slowdown last month was just a statistical glitch.

So why the Treasury rally?

Although it is slight as I write this, bonds are actually stronger (yields lower) on this release. I think it isn't any more complicated than people got set up for a huge beat. As I said above, the +298,000 on ADP plus all the positive sentiment about business conditions these last couple of months had everyone excited. Treasuries hit multi-year highs in yield yesterday going out, showing everyone was set up for a beat.

Gun to my head, I'd bet on bonds finishing stronger today with a mini-short covering.

What does this mean for the Fed?

Prior to the release, the odds of a rate hike (according to fed funds futures) in March was already 100%. Odds of a second hike in June was about 55%. Odds of a third hike by December was about 60%. Neither moved much, which just tells us we need more information (mostly from Fed talk, probably less about data) to cement additional hikes.

Three is probably the top end of where the Fed can be this year, so if we really price in that third hike, it is going to start being all about 2018. If we get to where the third 2017 hike is fully priced in, I have to imagine that we would also have a third 2018 hike priced in (both are priced at around 2.5 for each year). At that point, fed funds would be 2.5%. You have to imagine the 10-year would be higher than 2.60% and the 5-year way higher than 2.11% should that happen.

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