Investing.com - The January employment report released on Friday cemented the case for the Federal Reserve to move ahead with its plans to gradually remove monetary policy accommodation this year.
All of the major data points surpassed consensus expectations with the creation of 200,000 nonfarm payrolls and 196,000 in the private sector, while the unemployment rate held steady at a 17-year low of 4.1%.
More importantly for the Fed, average weekly hours rose by 0.3%, pushing the annualized increase to 2.9%, its highest level since 2009.
Wage inflation had been the major missing piece of the puzzle in the picture of a solid American labor market. In general terms, economists tend to consider an increase of 3.0% or more to be consistent with rising inflation.
ING economists noted that positive news from average earnings and pointed out that given the fact that companies such as Wal-Mart (NYSE:WMT) have credited Trump’s tax cuts as a way for them to afford higher worker pay “we suspect we will see the wage numbers pick-up further”.
“Consequently, it will need a big shock to prevent the Fed from hiking in March,” they stated, although they noted that a damaging government shutdown, with the next deadline looming on February 8.
“Nonetheless, it looks more and more likely that we will have to revise up our call for three Fed rate hikes this year to four,” the concluded.
Markets clearly felt the odds for increased tightening moved higher based on their reaction after the jobs report was released.
The U.S. dollar index, which measures the greenback against a basket of six other currencies, pushed to intraday highs of 89.10, gold futures hit an intraday low of $1,335.30 per troy ounce, while U.S. stock futures extended their losses on fears that the Fed could move faster in its policy normalization.
Notably, given the recent concern over the selloff in sovereign debt, the yield on 10-year bonds hit a fresh four-year high, pushing past 2.8% and remained close to the intraday high of 2.843%, the highest level since January 2014.
Odds for the next rate hike to take place in March were last at 82%, compared to around 79% earlier in the day, according to Investing.com’s Fed Rate Monitor Tool.
The probability of three hikes this year also increased to 68% from 61% ahead of the report.
While the jobs data also led strategists at Bank of New York Mellon to conclude that hike risk is now skewed towards four increases, markets remain skeptical. Fed fund futures currently price in the possibility below the 50% threshold at just 30%.