Payrolls Explode in March

Fed funds futures priced in a 50% chance of a quarter-point hike by June, compared with a 25% chance before the report was released. The chance of a hike by August moved to 100%.

The employment number also stemmed a weeklong slide in the dollar vs. the yen, against which it recently was up about 1% from Thursday. The U.S. currency added 1.7% against the euro for its biggest gain in a week. Gold plunged $8.60 to $420.20.

John Lonski, senior economist at Moody's, said the strength "will underpin the dollar exchange rate and perhaps make it less likely that the ECB will cut interest rates."

The Labor Department's headline unemployment rate inched up to 5.7% in March from 5.6% in April, a phenomenon that reflects additions in the number of people looking for work.

Malanga noted that average hourly earnings were only up one-tenth of a percent, which shows "wages were tame, productivity was strong, and unit labor costs were under control."

Economists, who had been criticized for overestimating the January and February numbers by wide margins, had been forecasting payroll growth of about 120,000 in March.

Job growth was spread out among sectors. Construction employment rose by 71,000 in March, bringing total industry growth to 201,000 over the past year. Retail employment jumped by 47,000 in March for a four-month gain of 132,000. Employment in health care rose by 36,000, bringing the yearly gain to 255,000. Professional and business services added 42,000 jobs.

Manufacturing employment was unchanged, stemming a three and a half-year-old swoon that only started to moderate late last summer.

"This clearly gives the Fed more flexibility than it had earlier in adjusting monetary policy," Malanga said. "As the Fed itself said, it would require a lengthy period of large jobs increases to cause any change in policy. They would also need to see a change in inflation."

Most economists think price pressure is unlikely as long as the average monthly gain is less than 200,000, and they also doubt the Fed would tighten late in an election year. So March's number is a political goldmine for the sitting president and the markets that love him.

"It's obviously good for Bush. This is no longer a jobless recovery," Malanga said. Still, it remains "a sub-job-growth recovery. Job growth is still lower than we would normally expect at an economy growing at this rate."

Pharmaceutical stocks were early beneficiaries of the report as traders wagered on a steady Medicare based on increased prospects for re-election.