Getting The "All Clear" Signal: Healthy Jobs Growth Solidifies Rate Hike Chances

The jobs picture continues to improve, very likely locking in a rate hike next week. Friday’s employment report also seemed to clear the way for the market to escape its recent doldrums, at least for the moment, as stock futures rose sharply after the data rolled out.

The economy added 235,000 jobs in February, the government said, above Wall Street analysts’ expectations for around 190,000, and slightly below January’s upwardly-revised 238,000. This marked the first back-to-back monthly gains of 200,000 or more jobs since last June and July. The unemployment rate was little changed at 4.7 percent.

But the positive story goes well beyond the headline number. The fact is, the economy created jobs at a healthy pace across key sectors, including construction, health care, manufacturing, mining, and professional and business services. One particular standout was 58,000 new construction jobs. And private education services, a category that hasn’t been in the spotlight, also saw 29,000 new positions. Health care and business services continue to be stalwarts.

Additionally, average hourly earnings rose six cents to $26.09, following a five-cent increase in January. Over the last year, average hourly earnings have risen by 71 cents, or 2.8%. That’s slightly above the rate of core inflation, and could be seen as positive news by the Fed, which has been watching to see if rising wages can help move inflation back above its target.

As the jobs news came across, odds of a Fed rate hike next week climbed above 90%, according to CME Fed funds futures. Although inflation data still looms (see below) before the Fed announces its decision next Wednesday, the jobs report is widely expected to be the final barrier the Fed needs to cross before deciding on a rate hike. At this point, there’s arguably no reason to believe the rate hike would be stopped by anything. This train is moving downhill.

Ahead of the jobs report, markets eked out a slightly higher close Thursday. The gains kept the S&P 500 Index (SPX) from suffering its first four-session losing streak since before the election. Keep in mind that despite the recent weakness, the SPX is down only about 1% from the all-time high it recorded at the start of the month.

Though the markets barely moved Thursday, volatility did pop a bit, with VIX rising back above 12 and staying there Friday morning. That’s still low historically, but the rise may indicate expectations for possible bumpier trading ahead of the jobs report and next week’s Fed meeting.

Gold fell to five-week lows early Friday below the psychological $1,200 an ounce level. If gold ends lower today, it would be the ninth-straight session of losses. Sagging gold prices seem to reflect rate hike expectations, as higher rates tend to lift the U.S. dollar. The dollar was slightly down against the euro but up at seven-week highs vs. the yen early Friday, and the dollar index is on track for its fifth-straight week of gains.

As the dollar builds strength, oil remains under pressure. Crude closed below $50 a barrel for the first time this year on Thursday and remained under that level early Friday but up slightly from Thursday’s lows. It looks like a huge number of bullish oil bets are being unwound after this week’s big U.S. supply build, according to Briefing.com.

Overseas, the Nikkei had a big day Friday, rising 1.5%, but other markets were generally mixed.

ECB Inching Toward Normal?

Hardcore Fed watchers have become familiar with catchphrases such as "measured pace," "considerable time" and even "irrational exuberance," and have used such nuanced changes in “Fed-speak” to gauge which way the winds may be blowing. The ECB and its president Mario Draghi have their own following, and their own catchphrases, but one long-used phrase was not included at yesterday's meeting — "using all the instruments available within its mandate." The phrase basically meant the central bank would continue its bond-buying scheme, under which the ECB's balance sheet has grown to about 2.3 trillion euros. Draghi later explained that the "sense of urgency in taking further actions" has eased. The ECB also upped its headline inflation outlook for the year to 1.7%, up from 1.3%. The news sent the yield on Germany's 10-year bund up 5 basis points to 0.42%, a significant move, but still 5 basis points from the 52-week top posted last month. The U.S. 10-year yield climbed to 2.62% early Friday, a more than two-year high. So though the rate differential is about the highest it's been, at least both central banks are seeing inflation numbers approaching policy objectives, and yields inching toward normalization.    

Oil is Flat. Really!

Crude oil futures’ drop below $50 a barrel on Thursday brings to mind a time just over 10 years ago, in early 2007, when the price dropped briefly to $49 after a long stretch above $50. After that, things went kind of haywire, with oil prices zooming up to $145 by the middle of 2008; falling to around $35 during the recession in the winter of 2008-2009; gradually climbing back to the $100 level again by early 2011, and then crashing all the way back to $26 early last year before doubling between then and late 2016. It’s been quite a ride, but here oil is, back at $49 due to bulging U.S. supplies, meaning someone who hadn’t watched the market over the last 10 years might think oil has been flat this whole time. Inflation-adjusted, oil is actually a bit cheaper than it was in early 2007, and although the energy sector took a hit from plunging oil prices this week, it’s arguably not a bad thing for the U.S. economy to have too much cheap oil around, as it takes down a major cost for all sectors.

Inflation Indicators On the Way

While today’s Non-farm payrolls report is arguably the most important data the Fed will see before its meeting next week, the producer price index (PPI) is scheduled for Tuesday morning, followed by the consumer price index on Wednesday morning. Those reports come just as the Fed meets and prepares to announce its decision on rates Wednesday afternoon. Both PPI and CPI were a bit elevated in January, with each rising 0.6% month-over-month. The core numbers — which strip out food and energy prices ­— were a little lower, but core CPI was still up 2.3% year-over-year, which is above the Fed’s target of 2% and may have helped Fed officials determine a rate hike might be needed.