Not too hot not too cold jobs data just right for March

The market has reacted to the February jobs report, the 235k increase in Non-Farm payrolls, the drop in the unemployment rate to 4.7% and the 2.8% annual increase in wages is good for stock markets, but not so good to drive the dollar or US Treasury yields higher.

Rate hike in June now not so certain…

While this jobs data is solid enough to sign, seal and almost delver a rate hike from the Fed next Wednesday, it is not too hot to force the Fed to embark on more than three rate hikes this year, which is what the market expects. In fact, since the release of the February jobs data market expectations of a US rate hike next week (according to the Fed Fund Futures market) have retreated a tad, down to 98% from 100%. Also, we haven’t seen any major increase in expectations for a June rate hike; the market is currently expecting an even chance of a subsequent hike in three months’ time.

Wage data holds the key to future Fed moves

Overall, wage data is key and although it has been trending higher since reaching a cyclical low in 2012, it remains below the 3.6% peak reached in 2007. Thus, if decent jobs growth and signs of labour shortages being reported by business to the Fed’s Beige Book, can’t trigger wage growth of more than 2.8%, the market is taking the view that sclerotic wages are here to stay. But is this the correct view to take?

Yellen will determine if the stock market rally will continue

As mentioned above this report has been good news for stocks, but not so good for the dollar and US Treasury yields, and at the time of writing the 2-year yield is heading back to key support at 1.35%. Whether or not stocks continue to move higher will depend on Yellen’s press conference on Wednesday night. If she does sound a note of caution about sluggish wage growth then we could see a continuation of Friday’s moves, however, if she takes the view that wage growth is a lagging indicator, which it is, and that wages could continue to push higher in the coming months, then it may be a reversal of fortunes, with stocks coming under pressure, and the dollar and Treasury yields recovering.

As we end of this week, the market is convinced of a March rate hike, investors are on the fence about a hike in June, and we expect directionless markets in the first half of next week, as we wait for comments from Yellen on the future path of US rates, which is likely to be the key theme for markets for some weeks to come.