NFP Market Reaction Summary

Summary market reaction to NFP data from Knight Capital:

NFP 192K v 196KE, prior 36K revised to 63K Private 222K v 200KE, prior 50K revised to 68K Manufacturing 33K v 49KE, prior 49K revised to 53K Unemployment Rate 8.9% v 9.1%E, prior 9.0%

Unemployment rate down to 8.922% from 9.050% as the participation rate held steady at 64.2% after dropping in Jan.  Household employment up 250K during the month, while the not in labor force category rose 87K.  Big gains occurred in construction and nondurable goods manufacturing as well as services, transportation and warehouse, information services, financial services, education and health services, and leisure and hospitality.  The government shed jobs during the period.  New businesses were assumed to have added 112K jobs per the birth/death adjustment.  The diffusion index for private employment rose to 68.2, indicating widespread job gains.

The front end of the curve rallied on the news, but still reflects a sizable chance (~28%) of a rate hike by year end.  The job gains look to be on track, sustainable, and reflective of a population makeup where the assumptions of 150K-200K gains for a “steady state” of unemployment might no longer ring true (as a wise client pointed out to us recently).  We would like to see further gains in the participation rate, which is about 200bp lower than the pre-crisis era, before we officially think that QE2 will be the end of the process.  For now, the possibility of a QE2 extension or QE3 introduction post June appears to be lowered.  The Fed will want that participation rate up too – as you cannot engender wage price inflation without it in all likelihood.  And we will eventually need wage price inflation to match the commodity price inflation we have already engineered.  For now, the Fed appears to finally be winning (however slightly) the game of chicken it is playing with the twin inflations.

And Goldman's permabullish take:

Nonfarm payrolls +192k in Feb vs. GS +200k, median forecast +196k.
Unemployment rate falls 0.1 point to 8.9% in Feb vs. GS and median forecast 9.1%.
Average hourly earnings flat in Feb vs. GS +0.1%, median forecast +0.2%.

1. Nonfarm payrolls rose 192,000 in February, basically in line with expectations. Moreover, payroll growth in December and January was revised up by a cumulative 58,000. As anticipated, the February increase appears to have received a boost from bad weather in January, as construction payrolls increased by 33,000 (versus a loss of 22,000 in January). At 33,000 the gain in manufacturing was weaker than the strength in recent manufacturing surveys would have suggested. Government employment fell 30,000, due to weakness in the state and local sector.

2. The household survey, however, was stronger than expected. In particular, the unemployment rate dropped another tenth (to 8.922%) due to a firm gain in employment (+250,000) and unchanged labor force participation (at 64.2%). The employment gain was also strong on a "payroll-adjusted" basis, up 342,000 on the month. The employment/population ratio remained unchanged at 58.4%. The decline in unemployment was broad based across different measures of unemployment; for example, the U6 unemployment rate, which counts marginally attached workers and those working part-time for economic reasons, declined by two tenths to 15.9%.

3. Back in the survey of establishments, the nonfarm workweek and average hourly earnings both remained unchanged, pushing the year-to-year trend in wages down to 1.7%.