Weak jobs keeps Fed at bay until second half

Workers assemble Jeep Wranglers at the Chrysler Toledo North Assembly Plant in Toledo, Ohio.
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Workers assemble Jeep Wranglers at the Chrysler Toledo North Assembly Plant in Toledo, Ohio.

March's shockingly weak job growth sent stock futures plunging and bond yields lower, but Wall Street is likely to look past what is yet another sign of first-quarter weakness if spring data shows signs of rebounding.

The report does, however, affirm market views that the Fed will move more slowly than previously expected to raise interest rates, and September remains the earliest time frame for the Fed to act in the minds of many traders. March's report of just 126,000 payrolls was the worst since December 2013, though the unemployment rate was unchanged at 5.5 percent.

Monday's markets could be choppy as a result. In thin trading Friday, the 10-year yield temporarily slid below 1.80 percent for the first time since February, and the euro broke a key level of $1.10 as the dollar weakened. Dow futures finished the Friday session down 165 points. The stock market was closed on Good Friday so traders were forced to bid on stocks in an early morning futures session that finished at 9:15 a.m. ET. Bonds were trading until noon.

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The weakness in employment was immediately blamed on winter weather, West Coast port strikes and slumping energy prices, but the report contained a surprise increase in wages. Average hourly wages rose by 0.3 percent, compared to an anticipated 0.2 percent.

"I think it reflects the weaker GDP growth we've had over the last two quarters, and I think we'll see a reacceleration of growth. Right now, we're seeing the effect of the energy decline but we're going to get the benefits of it in the coming quarters," said Mark Zandi, chief economist at Moody's Analytics. "I don't think we're downshifting to the degree the data suggests. I think the Fed is going to wait. It's got a few more months before it makes a decision. It's going to see if weather played a role in this and whether we reaccelerate. If we're wrong and things don't pick up, they'll delay a rate hike. But now I think they'll stick to schedule."

March's report had been expected to show 245,000 nonfarm payrolls, slower than the previous three month trend of 288,000. But even the prior two months were reduced by 69,000.

"I think the report is mostly disappointing. It's not bad news. It's certainly not surprising news, especially considering the tone of corporate America coming out of fourth-quarter earnings and really what we've seen in terms of estimates coming down for the rest of the year so corporate America is retrenching a little, but we had bad weather in February and March," said Brian Belski, chief investment strategist at BMO Capital Markets on "Squawk Box."

Belski said the Fed will continue as planned, and the wage growth is the key takeaway. The Fed's dual mandate makes both employment and inflation top priorities in the decision making process on interest rates.

Read MoreOuch! Job creation big letdown in March

The report follows a recent string of disappointing data, which puts the median estimate for first-quarter growth at 1.3 percent, according to CNBC/Moody's Analytics snap survey of economists. Jobs had been the strongest signal for the economy, continuing at a robust pace until now.

Inside the report, the signals were also mixed. For instance, labor force participation, or the number of working age people who have jobs or are looking for work, fell by a tenth to 62.7 percent, a negative. But on a positive note, the broad measure of joblessness, including people who gave up looking for work, fell to a more than six-year low of 10.9 percent from 11 percent.

"It's a confusing number. It follows a weak first quarter," said Peter Boockvar, chief market analyst at Lindsey Group of the weak first quarter. "I think (Fed officials are) waiting to see what the next couple of payroll reports are and what the unemployment rate is…Theyre' stuck in a tight spot."

The health care and education sectors added 38,000, and leisure and hospitality were up 13,000. Professional and business services added 40,000.

But other sectors showed the toll of falling oil prices, a firmer dollar, the port strike and winter weather. Mining jobs, reflecting energy workers, fell 11,000, putting the total decline at 30,000 this year. The weather impact was clear in the 1,000-position reduction in construction jobs, and manufacturing declined about the same.

Mesirow Financial chief economist Diane Swonk said the weakness in the jobs report supports the views of the more dovish wing of the Fed.

"The interesting issue is on manufacturing moderating," she said. "The issue is related to the long shoremen and the West Coast port strike. The problem is as it works its way out, we'll get some catch up but we have a strong dollar. There's some headwinds emerging we didn't have before. That really validates (Fed Chair Janet) Yellen's view that we need more improvement in the labor market."

Correction: The broad measure of joblessness, including people who gave up looking for work, fell to a more than six-year low of 10.9 percent. That figure was misstated in an earlier version of this article.