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The Federal Reserve remains on track to hike rates in March and at least two or more times this year after a surprisingly strong February jobs report, described by some economists as "the best of the recovery."
February's employment report — with 313,000 jobs created — marks a turning point for the economy. Companies are hiring at a rapid enough pace to bring the long-term unemployed off the sidelines.
But a softer-than-expected wage increase, just 0.1 percent, is tamping down some fears of inflation that flared up after last month's surprise wage gains kicked off a jump in interest rates and sent stocks into a correction. That January wage number was also revised slightly lower.
For the Fed, economists say the number is "Goldilocks," meaning not too hot to suggest an overheating, or more interest rate hikes, nor too cold, meaning the Fed could be concerned by softness in wages. For the markets, the economy looks strong, but not so strong that inflation will push interest rates up more quickly — a perfect case for stocks.
"These numbers are remarkable," said Ward McCarthy, chief financial economist at Jefferies. "806,000 people came back into the labor force and 97 percent of them found jobs. If you want a job you can get one. This is about as much as you can expect. … We've waited 10 years for this, and here we are."
February's job growth was 50 percent more than expected by economists, and the unemployment rate was steady at 4.1 percent. Besides the stunning number of new jobs, economists pointed to the surprise jump in the labor participation rate of 0.3 percent to 63 percent, meaning slack is being eliminated.
Stocks rose sharply after the report, but the bond market's reaction was subdued.
"A 313,000 nonfarm payrolls and 10-year note yields increased 2 basis points? That means average hourly earnings are a lot more important than headline nonfarm payrolls at this point in the business cycle," said Ian Lyngen, head of U.S. rate strategy at BMO.
Lyngen said the new entrants into the workforce meant employers did not have to raise wages to attract workers. "It does not suggest there's going to be any urgency on the wage inflation front. Some people are saying it reduces the probability that we get four rate increases this year," said Lyngen.
Lyngen said Fed funds futures moved slightly higher after the report, but not enough to begin pricing in a fourth rate hike this year, as some economists are forecasting. "We are now fully priced for three hikes for 2018, but not any more," he said.
The dollar firmed, and the Dow jumped 150 points on the opening.
"The bulls could not have conjured up a better scenario for the February jobs report than what the government actually printed," wrote Jeremy Klein, chief market strategist at FBN Securities.
The report showed a very strong hiring trend, with revisions to January bringing job growth up by 39,000 workers to 239,000, and another 15,000 brought December's payroll gain to 175,000.
"It's everything you want right now. It sets the stage for wage increases," said Diane Swonk, chief economist at Grant Thornton. January's wage growth was 2.8 percent year over year, revised from 2.9 percent, but still above February's 2.6 percent.
"The upward revisions held down wages a bit. That may be why we have 2.6 percent year over year in February. The year-over-year wages slowed. The market just feels like 'Goldilocks,'" said Swonk.
Swonk said strength in construction, with 61,000 jobs, was encouraging, as was a surprising 50,000 gain in retail after a 26,000 decline in December and weak gain of 14,800 in January.
She said the theme in retail is it's happening counter normal seasonality, suggesting it could be back-office operations or internet-based retail, as opposed to floor workers that would be added during the holidays.
"We're moving in the direction that everybody's been waiting for ... the wages are still yet to come, but they will," said Swonk.