Stronger Start Despite Stronger Jobs

Here's a puzzler--at least at first glance.  This morning's much-anticipated jobs report came out stronger than expected with nonfarm payrolls at 223k vs a median forecast of 200k.  The unemployment rate dropped to 3.5% vs a forecast of 3.7%.  These developments would normally be associated with some bond market weakness, but the initial reaction--while modest--has been decidedly positive.  The reason for the paradox is simple.  Wage growth slowed more than expected and last month's steamy number was revised sharply lower.  This allays some of the Fed's concern that high inflation could drive wage inflation, thus feeding the dreaded "wage price spiral."  

This is exactly what the market is trading this morning.  The Fed specifically mentioned wanting to see a slower pace of wage growth.  That's what today's report shows.  So the market is trading a slightly friendlier stance from the Fed, evident in stronger stocks and bonds.

This may look like a meaningful move on the chart above, but the bigger picture hasn't changed much.  Next week's CPI data has more of a chance to effect such changes.