What a Week: Payrolls Soothe

"This was an above-consensus report in many ways," says Michael Darda, chief economist of MKM Partners. The service sector created 168,000 new jobs in February, just off the 12-month moving average of 172,000. The 62,000 decrease in construction jobs is partially explained away by weather factors. "There's really no slowdown in the service sector, which comprises 86% of total employment," says Darda.

When traders noticed the higher-than-expected 0.4% increase in hourly wages, they remembered that on Monday, unit labor costs also were revised higher in the fourth-quarter productivity report. Wage inflation roared again. And suddenly, Federal Reserve officials' and U.S. Treasury Secretary Henry Paulson's hawkish comments on inflation and the economy this week seemed more in touch with reality.

In the middle of the week, calm words about the economic outlook or concerns about inflation seemed off base. With eurodollar futures traders pricing in 75 basis points of easing in the next year, the markets were wondering when the Fed would signal a move to a neutral policy stance.