Spectacular Jobs Report Lifts Dollar, Mid-Year Hike Still Most Likely Scenario

The US employment report was nothing shy of spectacular.  Job growth was better than anticipated. Back months were revised higher. Earnings growth recouped the December fluke. The participation rate jumped. It is true that the unemployment rate edged up, and the underemployed also ticked up. Yet, on balance, those who doubted a mid-year Fed hike have to reconsider.

The US created a net new 257k jobs in January, handily beating expectations, and in a month that has historically disappointed the consensus.  An additional 147k jobs were added to the November and December reports, which makes its the strongest three months of jobs gains in the US since November 2008. 

The focus was also on hourly earnings after last month's disappointment.  Hourly earnings jumped 0.5%, and the year-over-year rate rose to 2.2%.  It is the best since November 2013.  It is still not impressive from a historical point of view, but the 1.7% reading in December was a fluke.  

The jump in manufacturing jobs bodes well for industrial output.  The sector grew 22k jobs, well above the consensus estimate of 12k, and the December series was revised higher as well.  The unemployment rate edged up to 5.7% from 5.6%, but this was less than the increase in the participation rate, which is a constructive development.  

Since the end of the year, the market's consensus of a mid-year rate hike by the Fed has frayed.  We had anticipated that the consumption in Q4 was not as poor as the weakness in December retail sales indicated.  This was confirmed.  We also anticipated that the decline in hourly earnings was not going to be repeated.  Other measures of labor costs, like the Employment Cost Index itself, lent support to this hypothesis.  Today's data is encouraging as well.  

The pendulum of expectations is pushing back toward our view of a mid-year rate hike. We would subjectively attribute about an 80% chance, with the remaining 20% in September.  The Fed delayed the tapering by a couple of months from when it had appeared to signal it.    We could expect the forward guidance at the March FOMC meeting to shift, and the "patience" diluted to something more data-centric.