Jobs report is strong, but Fed can wait on hike

Hiring was stronger than expected in February, signaling the economy is far from recession, but the fact there was no wage growth should keep the Fed from raising rates until at least midyear.

There were 242,000 nonfarm payrolls added in February, far better than the 190,000 expected by economists. The unemployment rate remained steady at 4.9 percent, and revisions boosted job growth by a total of 30,000 for December and January. Disappointing, however was the decline in hourly earnings, falling by 3 cents to $25.35, after rising by 12 cents in January. Wages were up 2.2 percent year over year, weaker than the 2.5 percent gain in January.

"The big story right now is the labor market just shows no sign of slowing down," said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch. "The labor market has a lot of momentum here and people forget the payrolls are the No. 1 coincident indicator for the U.S. economy. ... The idea the economy is slipping into recession is way over done."

Harris said the report does not change his view on the timing of the Fed's next rate hike, which he has forecast for June. "It would be very awkward for them to hike at the March meeting, they haven't really prepared the market for it," he said.

June would be more likely for the Fed's second rate increase because the central bank has time to turn market expectations. "The Fed would wait to see the economy develop a bit further, and get more convincing evidence that inflation has turned."

Stocks waffled early Friday but were higher at midday, and Treasury yields edged up. The Fed sensitive two-year yield was at 0.85 percent. The jobs report is the latest piece of economic news that has beat economists' expectations, following retail sales and ISM manufacturing data.

"It's obviously a pretty solid report. There are a few flies in the ointment that cause a little bit of concern. We had the dip in wages in the month, which is presumably a payback for gains in January. We had a drop in the work week which was a little bit negative," he said. Hours worked declined by 0.2 to 34.4 hours in February.

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"It should be positive for markets today because there's no inflation," said John Canally, market strategist and economist at LPL Financial. "The key for markets is that the recession fears we had in January and February now feel silly. This report further removes the recession scare. The head-scratcher is the wage number."

Canally said wages fell most in mining (including oil drilling) and utilities, down 0.6 and 0.5 percent, respectively. But retail wages rose by 0.1 percent. He said another negative was the decline in temporary hires in the past two months, which possibly suggests companies are reaching capacity and will not have to hire so many workers in future months.

"The number's good ... if you believed in one rate hike or three rate hikes this, it didn't move the needle. It's good in the fact that new entrants are coming into the labor force. Participation was up 0.2 percent. They're being absorbed," said John Briggs, head of strategy at RBS.

But Briggs said the number did not change the market's view that the Fed's forecast for four rate hikes this year is too aggressive. According to RBS, market expectations for a December rate hike have moved up to 85 percent this week, but the first full rate rise is not priced in until March 2017.

The number was encouraging in that it showed an increase in labor force participation to 62.9 percent, a half percentage-point gain since September. Health care and social assistance added 57,000 jobs, and health-care jobs increased by 38,000. Retail added 55,000 jobs and construction rose 19,000, while mining jobs declined by 19,000.

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