Obviously, this is a very disappointing release. The headline jobs gained figure came in at a very ugly 126,000 and the previous two months were revised down by 69,000. Given this, my previous call of a Fed rate hike in June (already looking doubtful) seems off the table.
Hence it makes sense that the bond market is bull steepening -- which is where all bonds rally, but shorter-term bonds rally more than long-term bonds. As I write this, the five-year Treasury is nine basis points lower in yield, while the 30-year is just seven basis points lower. This move would have been more violent if the curve hadn't already steepened substantially over the last two days.
One aside on trading action today. In talking to street traders yesterday, virtually none of the big banks were going to have much staffing today. Just some of the Treasury traders, and most of them were only going to be in for a couple hours. So I'm not putting any stock into how credit trades, because no one is around. And I'd be careful about over-reading any technical indicator that trips today.
Getting back to the numbers, I'm not jumping to conclusions off this release. Here's why:
- Jobless claims aren't heralding any uptick in layoffs.
- Wages showed a mild acceleration, now +2.1% year over year. If labor conditions were deteriorating in a big way, this wouldn't be happening.
- Payrolls have given us several head fakes over the last three years. There have been 10 months in the last 36 when NFP was worse than this on the initial release. Three of those times were multi-month strings of weakness. Of the 10, seven were later revised higher. And of course, in all cases, the jobs picture later rebounded.
- Some of these were due to natural fluctuations, some due to real factors that just do not persist (weather being an obvious one). I suspect today's relative weakness reflects some U.S. dollar strength and some weather. The former should re-level manufacturing, but if real demand remains strong it shouldn't have a persistent negative effect on jobs. Our traded sector is just too small. Total employment related to producing goods is less than 14% of total employment.
- Weather, of course, will fade as a negative influence.
In case you are curious, "Mining" which includes Oil & Gas Extraction as well as Support Activities for Mining, dropped 10,000 jobs. Not much to write home about.
Getting back to the Fed, like I said, let's not get ahead of ourselves and extrapolate one figure too much. The three-month average payroll gain is 197,000. That would be enough to drop below 5.0% unemployment by year-end. The six-month average is 260,000. At that pace, we pierce 5.0% unemployment by September. I continue to argue that the Fed will want to be hiking by the time we get below 5.0% unemployment.
So now you have to ask yourself, which story makes more sense? That the economy is continuing to grow modestly and thus should keep adding jobs at a 200,000-300,000 pace? Or that things like weather, the port strike, and the dollar are irrelevant? While acknowledging that maybe the 300,000 pace we had in 2H 2014 was never sustainable ad infinitum, adding 250,000 is pretty reasonable. That still gets us to a rate hike in September, in my opinion.
As far as bond trading goes, I think the 10-year explores the 1.60% area in the next couple weeks. I'm going to play it from the long side until we get down there, at which time I might get short, depending on how the price action goes.