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March Rate Hike Still Likely Off the Table After Jobs Number

A steady unemployment rate and tick down in wages will likely stay the Fed's hand in March, but the market is still underestimating the prospect for hikes this year.

March Rate Hike Still Likely Off the Table After Jobs Number

Jeremy Glaser: For Morningstar, Jeremy Glaser. The U.S. economy added 242,000 jobs last month--well above expectations. Bob Johnson is traveling, but I'm here with Roland Czerniawski to for his take. Roland, thanks for joining me.

Roland Czerniawski: Great to be here.

Glaser: Let's start with this data. The headline number looked pretty good at 242,000, but there may be some questions about wage growth. What's your overall take on this report? 

Czerniawski: I think, overall, this was a good report that exceeded most expectations. As you said, we had 242,000 jobs added. The consensus only called for about 190,000, and our own expectation was about 210,000, so that was definitely a positive surprise. The previous month was revised up by nearly 20,000, so that was also a big plus. The unemployment rate remained at 4.9%. And as you mentioned, what was not so good about this report was a decline in hourly wages and the weekly hours worked. But I think it's important to underline that those numbers tend to be really volatile on a monthly basis. So, maybe that reading isn't as important as the market thinks it is right now. 

Glaser: When you look at the different sectors, were you surprised by the makeup of these job increases or was it similar to what we've been seeing? 

Czerniawski: I think it's more of the same, really. If you look at the category breakdown, we've seen some strong performers. The best was healthcare with 57,000 jobs added; retail trade had 55,000, followed by education and professional and business services. All of these categories, with the exception of retail trade, are actually relatively high-paying jobs. So, I would say that the makeup of the report was relatively high quality. When it comes to retail trade, I think it's important to mention that, on a nonseasonally adjusted basis, retail has actually lost jobs. The 55,000 gain that we see is actually just a seasonal factor added back. So, in other words, we essentially didn't lay off as many retail-trade workers as the seasonal factor would have anticipated. 

On the not-so-good side, we have the majority of the weakness, again, concentrated in the goods-producing and manufacturing side. We had mining losing 18,000 jobs and durable-goods manufacturing losing 12,000. So, I think it's more of the same: We see the job weakness being concentrated mostly on the goods-producing side, and the services economy is doing much better and is outpacing the rest of the economy as far as the job growth. [Note: restaurants were also one of the top-gaining sectors in the month].

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Glaser: We had a decline in temporary workers. I know there are some who say that this is maybe a sign that employers are tightening their belts a little bit. Does that concern you at all? 

Czerniawski: No, it doesn't necessarily concern me based on this single-month reading. The reason I say that is because we just had a January report, and what happens typically in January is we lose a lot of jobs in the temp category. That's something that's very seasonal. It happens every year. Sometimes, the spillover from January can extend into February. The seasonal factor in February is not strong enough to correct for that, so I would be really careful when looking at the temp numbers--especially early in the year where we typically lose more jobs than we add.

Glaser: You mentioned that jobs were added in some higher-paying sectors, but that didn't show up in the wage data and it didn't show up in hours worked. Why do you think that number stepped back? 

Czerniawski: That's a very good question. I think it's a very difficult one to answer. Overall, the hourly wage-growth data was down $0.03 on a monthly basis or 0.1%, and hours worked was down 0.6%. So, this is not the greatest news; but at the same time, I would say this is not necessarily a reason to worry. We've seen that wage data historically has been really volatile on a monthly basis, and those monthly swings tend to often reverse themselves in the following months. So, before we really draw any conclusions and try to come up with any particular reasons for why the reading this month was so weak, I think it's probably well advised to maybe see whether the weakness in the wage growth and the hours will be persistent going into the next month because, as I said, we can very easily see those declines completely reverse themselves in March.

Glaser: So, we have a pretty good headline number that's near the level where it might force the Fed to move maybe a little bit earlier than people were expecting. How do you think this impacts central-bank policy? Is a March increase on the table or are we looking more toward June or later in the year?

Czerniawski: I think this report has some implications for the Fed. I think, overall, this was a good report: We saw higher-than-expected job growth, but what we did not see was an increase in wages or a further decline in the unemployment rate. Had we seen all three of those elements present in today's report, the probability of a March hike would have been much higher. Given that we only see one out of the three, which was job growth, I think that the probability of a rate hike in March remains somewhat unlikely. The markets are currently pricing the probability for March at less than 5%. So, I think the markets have decided that March is off the table. I tend to agree that it would be really unlikely for the Fed to act now, especially given the wage data in today's report. With that being said, I think that the markets are somewhat underestimating the overall probability of rate hikes this year.

Based on the futures data, the markets seem to be predicting that there won't be another rate hike until late in 2016. In our opinion, that's not necessarily the most likely scenario. Given the recent uptick in core inflation that we've seen and the Fed's concern with inflation, if we continue to see more of the same economic data as well as maybe some help from improved wages, a rate hike within the next three to six months is somewhat likely--barring any major disasters. It's definitely more likely than the market seems to be suggesting. So, I think it's important to reaffirm that the Fed probably will be committing to the continuation of their policy. Counting on just one hike late in the year is maybe a little bit too optimistic.

Glaser: Roland, thanks for your analysis today.

Czerniawski: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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