Stocks and Treasuries fell and the dollar climbed as the jobs report provided enough positive economic news to bring a Federal Reserve rate hike back into market focus.
The Dow tumbled 211.82 points, 1.29 percent closing at 16,204.76, its weakest level since January 28th. The Nasdaq was the biggest looser among the equity averages, shedding 3.25 percent, 146.41 points to close at its lowest level since October 20th, 2014, 4363.15 The S&P 400 lost 35.43 points, 1.85 percent to 1880.02.
Treasury prices finished off their worst levels of the day. The yield on the 10-Year settled at 1.8426 percent, essentially flat, having been as high at 1.8909. The 2-Year, more sensitive to vagaries in short term rate policy, gained 2 basis points to 0.72 percent. Its return had been as high as 0.77 percent intra-day.
West Texas Intermediate lost $0.64 to finish at $31.00 about two-thirds of the way down the range of the last two weeks.
Non-farm payrolls added 151,000 new positions in January. That was less than the 190,000 forecast and December’s figure was revised down to 262,000 from 292,000, according to the Labor Department. Private payrolls rose 158,000, missing the 180,000 estimate.
However, the unemployment rate dropped to 4.9 percent from 5.0 percent, its lowest rate in almost eight years. Average hourly earnings rose 2.5 percent and the December gain was raised to 2.7 percent, the best annual increase in wages since 2009. Average weekly hours rose 0.1 to 34.6, the first increase since July and the labor force participation rate rose to 62.7 percent, its third increase in the last four months. The manufacturing sector, a bit surprisingl,y added 29,000, its best performance in two and a half years.
Rising wages have long be anticipated by Federal Reserve policy makers as the slack in the labor markets is taken up by the robust job creation of the past two years. Since the beginning of 2014 the economy has created 230,000 new jobs each month which should have, in the Fed's thinking, forced employers to raise wages.
But wages had remained stubbornly moribund. The average annual increase in the same period was just 2.1 percent through this past June’s 2.0 percent. Since then however wages have jumped 0.7 percent in six months, the steepest gain since the second half of 2008, though 0.2 percent of that gain was given back in January.
The Fed has predicted that core PCE inflation would rise back to its 2.0 percent target for more than two years. The wages gains of the past six months are the first visible signs that their patience may be rewarded.
The yields on Treasuries have been under steady pressure since the New Year, despite the Fed rate increase on December 16th.
Credit market have been unnerved by turmoil in Chinese markets and uncertainty about the state of the world’s second largest economy, by the collapse in crude oil prices and a string of poor U.S. data, which undermined the conviction that the Fed would be able to raise the Fed Funds rate to 1.5 percent from its current 0.5 percent by the end of the year.
Before Friday's Employment Situation Report, Fed Fund futures were showing almost no chance of a rate increase at the March FOMC meeting and only about a 34 percent chance of even one 0.25 percent hike by the end of the year.
In their projection at the December 16th meeting when the central bank increased the Fed Funds rate for the first time in almost a decade, the members of the FOMC foresaw four 0.25 percent rate hikes in 2016, dependent, of course on the evolution of the U.S. economy.
The odds for a March rate hike, according to CME data, have risen slightly after the payroll report and are now about 10 percent, with an almost even chance, 48 percent of a hike in December.
The dollar recouped some of its recent losses against the euro, closing at 1.1157 about mid-way in its range but better than Thursday’s finish at 1.120 which was the united currencies first essay over 1.1200 since last October.
Against the yen the dollar was largely unchanged, opening at 116.78 and closing barely 10 points higher at 116.87. The yen has strengthen 4 percent since touching 121.69 on January 29th as markets have soundly rejected the effectiveness of the limited negative rate policy instituted by the Bank of Japan.
Gold gained $17.81 finishing the day at 1173.40 its strongest finish sink least October. Since reaching $1062.11 on December 3rd the precious metal has added 10.5 percent to its dollar price.
The Dollar index (DXY) rebounded to 96.96, having closed at 96.47 on Thursday after two days of heavy losses, its worst level since October 22nd.
Chief Market Strategist
WorldWideMarkets Online Trading