Jobs Data Highlights The Fed's 'Sweet Spot'

Friday's much anticipated jobs report brought some buying into the equity market and a pull back in long-term bond rates. After rallying much of the week, the 10-year note sold off two basis points and closed at 2.43 percent.

Inside The Jobs Report

The overall US economy added 248,00 new jobs in September and the private sector portion was 236,000. The prior month was also revised up to 180,000 from the previously reported 142,000.

Other closely watched indicators in the report suggest that the improving jobs market is not generating any wage growth or inflationary pressures. In fact, the overall size of the labor pool continues to fall. The labor participation was 62.7, the lowest in 36 years.

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Average Weekly Hours were unchanged, as was the length of the workweek. Average Hourly Earnings fell by 0.1 percent for the month. The data suggests the strong jobs creation has yet to trigger any progress toward wage inflation. Without wage growth, price inflation or an increase demand for credit are difficult to generate.

The stronger dollar, which makes foreign labor and equipment cheaper for business owners, is also putting downward pressure on wages. The U.S. Dollar Index closed near its 52 week high at 86.64.

The lack of wage growth is not a result of significant labor slack. The jobs market continues to tighten.

The overall unemployment rate fell to 5.9 percent, the lowest since July 2008. The U-6 rate, which includes those working part-time due to economic conditions, went down from 12.0 percent to 11.8 percent.

The Fed's Sweet Spot

The Federal Reserve is in a rare “sweet spot”.

The U.S. economy is approaching full employment without any inflationary pressures on the horizon. The strong dollar, lack of wage pressures, and economic slowdowns around the world are keeping U.S. prices stable. Last month it was reported that year-over-year CPI was 1.7 percent, below the Fed's target of 2 percent.

After QE3 ends, the Fed can remain data dependent before raising the Fed Funds Rate. The consensus among economists remains for the first rate hike in July of 2015. Nothing in last Friday's report will change that outlook.

When the tightening cycle does begin, the Fed can raise rates gradually as long as inflationary pressures remain muted. The drop in oil and commodity prices suggests that market participants have lowered their inflationary expectations going forward.

The U.S. Treasury market continues to be an attractive investment for foreign capital.

In addition to the safe–haven quality during times of geo-political tensions and falling global equity markets, the U.S. bond market offers an substantial yield pickup to similar maturities in Europe and Asia. Last, the strong dollar allows foreign investors to reap capital gains in both the underlying asset and the currency appreciation.