Job growth was basically in the sweet spot in December, with payrolls expanding much more than expected.

The gain of 167,000 was 67,000 more than the consensus forecast and about 100,000 more than where the market was leaning, as evidenced by the economic derivatives auction that took place this morning at the Chicago Mercantile Exchange. Previous months were revised upward, making the headline gain even stronger.

The source of payroll strength continues to be the service sector, which added 178,000 jobs in December. The health care sector also remained a top source of job growth, adding 38,000 jobs during the month. There was also strength in administrative and waste services, which added 26,000 jobs, thanks largely to a gain of 15,000 temporary jobs.

Today's data further reduce the odds of an interest rate cut from the Federal Reserve, but they do not significantly raise the odds of a rate hike.

One of the more compelling reasons why today's report lowers the odds of a near-term rate cut is the strong growth in hourly earnings, which increased 0.5% in December vs. the consensus of a 0.3% rise. That puts the gain at 4.2% vs. a year earlier, only slightly below the 23-year high of 4.4% set in 1998 and 1990. The wage gain reduces the importance of the recent decline in commodity prices, given the heavy weighting that labor costs play in the inflation process.

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