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Nonfarm payrolls surpassed expectations posting robust gains of +227k in January. The slight uptick in the unemployment rate (4.8% -vs.- 4.7%) was probably a byproduct of the rise in labor force participation. Average hourly earnings, however, disappointed rising a modest 0.1% m/m and wage growth slipped back to 2.5% annualized rate. This report, while still depicting a labor market that is near full employment, reduced market expectations for an imminent rate hike as wage and price pressures remain subdued.
- Why is it relevant?
The minutes from the last FOMC meeting showed many members adopting a cautious stance, implying that there would be "ample time" to respond if inflation emerged. There appears to have been a shift in that sentiment and nowhere is that more apparent than the sharp rise in US 2YR yields.
The notion of a March hike appears to have gained quite a bit of momentum recently and comments from FED Chair Yellen et al. has the market pricing in a 80 percent probability that the FOMC will raise the Fed Funds rate on the Ides of March. Of particular note is the emphasis that Yellen has placed on the inherent risks in waiting too long before hiking rates. Recently (3/3) she reiterated, "We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect". This Friday’s NFP will be the most significant economic data point prior to the FOMC meeting. Should this report meet or beat expectations then last month’s dip in earnings would be seen as an outlier, further stoking speculation to the point where a March hike becomes a foregone conclusion in the markets view.