Nonfarm Payrolls Analysis: Markets cheer low wages, inflation fears may swing stocks back down

• The US economy gained 311K jobs in February, exceeding expectations once again. 
• Wage growth fell short of expectations with a meager increase of 0.2% last month. 
• Markets are clinging to hope of lower services inflation and pushing stocks up and the US Dollar down. 
• Federal Reserve hawks are unlikely to give up, and push for a 50 bps hike, pending the inflation report.

Is Silicon Valley getting closer Main Street? Techies in California have always earned more than others, and perhaps as a result of their struggles, average wage growth is down. Fears of tech layoffs and the woes at Silicon Valley Bank (SVB) have yet to reach the wider economy, but a small increase of 0.2% in Average Hourly Earnings is taking its toll. The US Dollar is down. 

After the whopping leap of 517,000 positions in January, Nonfarm Payrolls (NFP) figures for February were always bound to show a weaker number this time. Nevertheless, the economy added 311,000 positions and last month's figure was only marginally revised lower to 504K. 

After suffering from the SVB story and Federal Reserve Chair Jerome Powell's hawkish comments on Tuesday, stocks clung to weak wages to recover. Apart from the small monthly rise of 0.2%, salaries rose by only 4.6% in February, a tad lower than 4.7%. 

Another positive for stocks is a shorter working week – 34.5 hours vs. 34.7 expected. While more workers were added, they spent somewhat less time at the job. Another piece of good news came from the increase in the participation rate to 62.5%. The steaming hot labor market is attracting people that were on the sidelines. Eventually, an increase in participation should lead to weaker bargaining power, lower wage growth and subdued inflation. 

All these serve as reasons to be cheerful for companies who would pay their workers less. It also means less pressure on the Fed to increase borrowing costs. The central bank is focused on "non-shelter core services" prices – closely related to salaries. 

Nevertheless, I want to stress that there is still one more critical data point – the Consumer Price Index (CPI) report for February coming out on Tuesday, March 14. That inflation number will likely provide the final verdict.

The current market party and US Dollar bashing will likely extend toward the weekend. But after a party, there is always a hangover. Stocks could retreat on Monday ahead of Tuesday's critical inflation report. One report showing a deceleration in wage growth does not imply a fall in inflation.