Rate snapshot: Economy improving, but pace is dismal

by MPA02 May 2014

The first Friday of each month is always a wild one in terms of price action.
Today no different as the April employment report was another miss on the consensus estimates. The unemployment rate fell to 6.3% from 6.7% in March, non-farm jobs were thought to be +215K, as released +288K, private jobs expected up 213K increased 273K, Feb and March jobs were revised up an additional 36K from original reports. The decline in the unemployment rate is the lowest since Sept 2008. BLS said the average job growth over the last two months was 238K/mo. The April job growth was the most in two years, the 288,000 gain in employment was the biggest since January 2012. Those are the bullish headlines. On the other side there is reason to not to take the data at headline value.

There was no increase in the average hourly earnings that usually increase 0.2% a month. Average hourly earnings held at $24.31 in April, and were up 1.9% over the past 12 months, the smallest gain this year. BLS said the decline in the labor force unemployment rate was due to 800K decline in people looking for jobs. The labor force participation rate which indicates the share of working-age people in the labor force, decreased to 62.8%, matching the lowest level since 1978, from 63.2% a month earlier.

The report, as always, has something for everyone; better job growth and a decline on the unemployment headline gets the positive nod. The decline in the labor participation rate and the lack of any increase in average hourly earnings gets the negative nod. The initial reaction off the headlines sent the 10 yr note to 2.69% from 2.61% yesterday and pushed US stock indexes higher than prior to the 8:30 release. The jobs report was good, better than what was expected but is tainted somewhat with a decline in the participation rate suggesting many have simply given up looking for work. At 9:30 the stock market opened a little better with the DJIA +4, NASDAQ +9, S&P +1, the 10 at 2.66% +5 bp after climbing to 2.69% on the knee jerk, 30 yr MBSs -17 bps after falling 42 bps on the jerk.

In Europe; the unemployment rate was unchanged at 11.8% close to 12.0% the record last year. German unemployment 5.1%, the best of the EU; the lack of inflation is increasingly worrisome for Mario Draghi as the EU outlook for employment is not improving and may lead to a structural deflation that will drag the economies down even more. Nothing new in the Ukraine/Russia situation this morning. Ukraine sent armored vehicles and artillery to retake Slovyansk, a stronghold for pro-separatist forces, defying President Vladimir Putin’s demand to pull back troops with Russia’s army massed across the border.

The economy is improving, the pace is dismal. The labor participation rate stands out as a major concern; the unemployment rate will continue to decline as more people just toss in the towel looking for work. That isn’t a good thing; the employment situation can be seen as improving on the headline but structurally the job markets are still not as positive as the data headlines represent. More focus should be on the increasing number of people that stopped looking. Not implying the employment situation is a house of cards, just that we have to look past the headlines and widen our perspective somewhat to understand that when we mix all the recent data into the soup it still needs some additional seasoning to get the taste right.

Although traders are consumed with the employment report, at 10:00 March factory orders were expected up 1.4%, as reported orders increased 1.1%. Markets have no interest in it now as everyone still trying to assess the employment data.

From purely a technical point of view, forgetting the headlines this morning; the 10 yr note has again tested an failed to break below 2.60%, 5 times now since late January the yield has fallen to 2.60% and for one reason or another has found solid resistance.

RateSnapshot courtesy of TBWSratealert.com


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