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The pickup in wages last month came as core CPI data over the last 12 months also rose above 2 percent, the Fed's targeted level. But more importantly, PCE inflation, the Fed's preferred metric rose 1.7 percent in January, a 0.3 percent from December and a leap toward the Fed's target. Market expectations for a Fed rate hike shifted Friday after the data, rising to a more than 50 percent chance for a second rate rise by December.
"This is going to be a real interesting time because remember (Fed Chair Janet) Yellen said … if inflation comes back quicker, rates could go up faster," said Chris Rupkey, chief financial economist at MUFG Union Bank. But Rupkey said the market is not pricing in a rate hike, and the 10-year note yield stays stubbornly low, at 1.76 percent Friday.
While the nonfarm payrolls fell to 151,000 in January, economists see the economy as entering a period when job creation is peaking out.
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"I think the problem we're running into is we reached the employment side of their (Fed) mandate, so payrolls lose some of its power," said Rupkey. "But Yellen has said that in order to have confidence their inflation target is going to be met, they want to see growth and jobs creation remain strong. For me, we've crossed the finish line on jobs, and they lifted off."
So traders will watch every measure of wages and inflation because the Fed could face a dilemma if inflation starts to take off, at the same time financial conditions worsen or the U.S. economy slows too much. There is little expectation for a rate hike at the Fed's next meeting March 16, but some economists expect Fed officials may be ready to raise rates by their June meeting.
Even before the U.S. opens for trading Monday, markets could get some news from the G-20, meeting in China. Also, the euro zone inflation data could have a negative impact on the euro if it does slip into negative territory, according to Robert Sinche, global strategist at Amherst Pierpont. Traders will be watching the data against the backdrop of the upcoming European Central Bank meeting March 10, where the ECB is expected to consider further easing steps.
"If the headline turns back negative, there will be enormous pressure on the ECB to do something," said Sinche. "The reality is what can they really do? I think the global markets are coming back to the view of what negative rates are really doing. Is it really a benefit?"
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