Why worry? Jobs report fuels relief rally

Stronger job growth in September should allay concerns that economic expansion could be cooling, and reinforces the view that the Fed is on track to begin raising interest rates next year.

Stock futures rallied off earlier gains, and Treasury yields held at higher levels, while the dollar rose on the report that 248,000 nonfarm payrolls were added in September. The unemployment rate fell to 5.9 percent, under 6 percent for the first time since 2008.

August payrolls were revised higher to 180,000, up 38,000, and closer to the 12-month average of 213,000.

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"We're still in the mode that the economy is creating 200,000 jobs a month and that keeps the Fed on pace to tighten in the middle of next year," said John Canally, market strategist and economist at LPL Financial. "That should help to calm the nerves that the economy is weakening. ... It reinforces the economy is doing just fine."

Canally said he had many calls from investors this week, worried that the economy was faltering as stocks sold off.

Certainly, weakness in Europe and China were a focus this past week as markets reacted violently, amid speculation that the U.S. may not be able to continue to grow at a sustainable pace due to global softness.

More positive news for the economy came in U.S. trade data, also released Friday. The deficit narrowed to $40.1 billion on record U.S. exports of $198.5 billion and a small increase in imports to $238.6 billion. That is expected to boost GDP, which grew at a pace of 4.6 percent in the second quarter and at an estimated roughly 3 percent in the third quarter.

Read MoreTrade deficit drops to $40.1 billion

Credit Suisse economists raised their tracking estimate for third-quarter GDP to 3.2 percent from 3 percent on the trade data.

They also noted that the average workweek reached a new cycle high at 34.6, and hours worked rose a strong 0.5 percent on the month, for the best reading since March.

"Wages were flat and hours worked increased. It's not like there's any pressure that we're seeing, other than more people got to work. It's a firm report. It's not going to change the Fed," said David Ader, chief Treasury strategist at CRT Capital.

Traders have also been gaming when the central bank will move to raise interest rates. While economists mostly expect the first hike in June, the markets have not been pricing in rate hikes at the same pace as the Fed.

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"They're priced for lower for longer, and this kind of number slaps them across the face, and says maybe they are going to raise rates in the middle of next year," said Canally.

Deutsche Bank's chief economist, Joseph LaVorgna, said the employment report should not only wipe out worries about the economy but emphasizes that it's getting stronger.

"You look at the raw number, and we had a 701,000 increase in the amount of people employed. That's almost as high as we were in 1996. This is just an awesome number," he said.

Traders closely watch the wages within the report because if wages start to rise that could get the Fed to move for fear of inflation.

LaVorgna said the report shows that the central bank has been too slow to act to raise interest rates, even without wage gains. Average hourly earnings for all employees in private-sector jobs declined by 1 cent to $24.53. Wages were up 2 percent year over year.

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"It's just a matter of time before you get some wage pressures," said LaVorgna. "How can the Fed avoid a financial accident in some capacity with the economy being as strong as it is and rates misaligned as they are."

Economists had expected 215,000 nonfarm payrolls, and an unemployment rate of 6.1 percent. The September report shows broad-based hiring with 81,000 jobs added in professional and business services and 35,000 in retail. Construction added 16,000 jobs, and health care added 23,000.