Fundamental Macro

February payrolls surprised materially on upside, printing 295K vs median expectation of just 235K. The expected combination of payback from a run of very strong prints and bad weather didn’t materialise, and instead the old favourite of the 3-month moving average would have got you closer than anyone in the survey.

Alongside the strong jobs numbers was a more modest household survey increase (admittedly after a stonking print last month) a small decline in participation and, as a result, a decline of two tenths in the unemployment rate to a new cyclical low of 5.5%. That puts it at the top of the range of the FOMC’s long-run estimate or natural rate. So one might have expected that the modest pickup in wage growth observed in recent months might have continued or even accelerated. But instead private sector hourly wage growth eased back to 2%, from 2.2% last month, and remains stuck in the same range of the past few years. As in recent months though, hours worked has moved in the opposite direction on the month, leaving a weekly measure of earnings growing a little quicker, around 2.5%.

So this report isn’t the smoking gun that the hawks need to start the discussion about rate hikes in a couple of weeks. Some on the FOMC will no doubt use it as ammunition to lower their long-run estimates of the natural rate, and hence leave slack unchanged. But if we continue to see this pace of jobs growth, then wage pressures will be in the pipeline. The often-cited U6 underemployment measure fell 0.3pp and is on track to get back to its pre-crisis average by the end of 2015 or early 2016.

The market reaction was very interesting. Big fixed income sell-off, curve steepening and dollar rally. Perhaps not surprisingly SPX took a knock, although not dramatically so.

With half a hike priced for June and more than a full hike priced by September looking about right, the big question now is whether the curve can steepen materially from here and if it does, whether equities can cope?