Good jobs report turns into bad news for bonds and stocks this morning

The U.S. economy added 200,000 jobs in January, the Bureau of Labor Statistics reported this morning. Economists surveyed by had expected 180,000 net new jobs. The official unemployment rate remained at 4.1%. The U-6 total unemployment rate, which includes people who have stopped looking for work and workers in part-time jobs who would like full-time work, rose slightly to 8.9% in January from 8.0% in December.

The big news, though–the news that has rattled the bond market–is the increase in average hourly earnings of 0.3% in January and a revision to 0.4% in December from 0.3%. That brings the year over year increase in average hourly earnings to 2.9%, the fastest wage growth since 2009.

And since the Federal Reserve’s inclination to raise interest rates has hinged, at least partly, on a belief that wage inflation would pick up as unemployment stayed at 4.1%, the market has concluded that this increases the odds that the Fed will increase interest rates at its March 21 meeting. The CBOE FedWatch tool, which calculates the odds for a move by the Fed by tracking prices in the Fed Funds Futures market, today puts the odds of an interest rate increase at the March 21 meeting at 77.5%. That’s up from just 38% odds on January 2.

As you might expect, financial markets aren’t happy at the prospects that the Fed will move more strongly to raise interest rates. The yield on the 10-year Treasury climbed (as prices fell) to 2.84% this morning, up 5 basis points from yesterday and up 38 basis points in the last month. (It takes 100 basis points to make up one percentage point.) The yield on the 2-year note, which tends to respond very quickly to interest rate increases by the Federal Reserve, climbed to 2.15%.

Stocks are lower with the Dow Jones Industrial Average off 1.32% as of 11:40 a.m. New York time and the Standard & Poor’s 500 stock index down 0.98%. The drop in the S&P 500 has pushed the index down 2.9% from the all-time high hit last week. That puts the index in range of posting its first retreat if 3% in almost two years. The S&P 500 has gone 404 days without recording a 3% drop. That’s the longest stretch ever in S&P 500 data stitching back to 1928.

The Dollar Spot Index is actually up, oddly enough, by 0.66% to 89.25. On the dollar’s strength gold is off 1.10% this morning and West Texas Intermediate crude is lower by 1.64%.