The strong February Employment Report provides the Fed with final justification for a 25 BP rate hike at next week's FOMC Meeting. But, the Report also suggests the possibility that job growth will slow this Spring. This macro-economic outlook would likely provide a window in the next month or so for both stocks and Treasuries to rally.
February Payrolls (+235k) came in below the ADP Estimate (+298k), but still above consensus (+190k) and trend (75-125k). But, the real question is whether the outsized-gains in January and February will reverse in March. Seasonal factors may have overly boosted job growth in these unusually warm winter months. Also, there could have been catch-up in January and February from the slow job growth that occurred in Q416, the latter possibly resulting from election-related caution in hiring. A March increase in the 100-125k range is not out of the question, as that would bring the Q117 m/m average in line with the +192k m/m H216 average.
While the Unemployment Rate ticked down to 4.7%, the components suggests that the "supply-side" of the labor market is expanding along with demand -- thus raising the possibility that a pickup in economic growth will be non-inflationary. Both the Labor Participation Rate and Employment-Population Ratio rose.
To be sure, Average Hourly Earnings shows that wage inflation remains an upside risk in the inflation outlook, but is not a problem yet. While AHE rose a below-consensus 0.2% m/m in February, it was revised up in December and January. As a result, the y/y rose to 2.8% from 2.6% in January but stayed below the 2.9% in December 2016. Note that calendar considerations suggest another 0.2% m/m increase in AHE in March, which would keep the y/y at 2.8%.
Average Hourly Earnings (y/y percent change)
February 2017 2.8
January 2017 2.6
December 2016 2.9
December 2015 2.6
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