NFP React: Wages and Unemployment suggest March is a go for the Fed, Yields rise

A big deceleration in hiring will do little to change the Fed’s hawkish course. Today’s nonfarm payroll report required a good look at all the numbers and not just the headline miss.  Wall Street is focusing on the robust prints with wages and the unemployment rate.  After the initial dust settled from the NFP report, expectations for a March Fed rate hike rose from around 74% to 80%.

The headline miss of only 199,000 jobs created in December is getting written off as many traders are focusing on the household survey that showed 651,000 found employment.  Self employment is also contributing some distortions when comparing the BLS report to the household poll.  The October report saw the 546,000 headline revised to 648,000.

The wage data stood out as both the monthly and year-over-year readings came in higher than expectations along with upwardly revised prior readings. Wages rose 0.6% (0.4% expected) in December and 4.7% (4.2% expected) in 2021.  The unemployment rate dropped from 4.2% to 3.9%, which is now less than half a percentage point from pre-COVID levels. The labor shortage problem is forcing employers to raise wages and with the unemployment rate improving to the best level since February 2020, the Fed can say the US is at maximum employment.

FX/Treasury

The labor market is still looking tight and that gave Treasury yields permission to edge on higher.  The 5-year Treasury yield tentatively tested the 1.50% for the first time since January 2020. The 10-year Treasury yield rose 2.7 basis points to 1.748%, while the 10-year real yield rose 3.8% to -0.7707%.

Treasury yields have a clear path higher as the Fed tries to get to the neutral rate and figure out how they will handle the balance sheet runoff.

Following the US payrolls reports, the dollar edged lower despite Treasury yields extending higher.  EUR/USD has been finding support around the 1.13 level and that might hold until next week.

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