Rate Snapshot: Job growth could mean earlier rate hikes

by 06 Mar 2015

By David Shirmeyer, CEO at Sigma Research

The usual walk on the wild side when employment data is reported didn’t disappoint. Forecasting job growth is impossible as we noted yesterday. The consensus estimate (if there is such a thing) was for job growth in the 230K to 240K range, as reported jobs increased 295K, private jobs also much stronger than expected, up 288K.

The unemployment rate was thought to be 5.6% from 5.7% in Jan, unemployment fell to 5.5%. Average hourly earnings up 0.1%, yr/yr +2.0%, slightly slower annual gain than January’s annual gain of 2.2%.

The labor-force participation rate fell to 62.8% in February from 62.9% in January. The figure is near the lowest level since the late 1970s. Yellen told Congress last week the labor-force participation rate is lower than expected “and wage growth remains sluggish, suggesting that some cyclical weakness persists.”  Vice Chairman Stanley Fischer said last week the central bank looked most likely to raise interest rates in June or September, although economic developments might warrant different timing.

Now what will the Fed do about increasing interest rates, and when will it begin? Until 8:30 this morning there was a growing belief the Fed would wait until later this year because incoming data painted a mixed picture that Yellen was concerned about. Now with this report this morning the momentary concern is the first rate hike has returned to June from later this year.

The last three months average job growth at 288K, but no increases in wages. The reaction in the bond and mortgage markets this morning isn’t surprising, the 10 yr jumped to 2.20%, up 9 bps from yesterday’s close and completely taking out our last vestige of near term support at 2.12%.
Yesterday afternoon we reported a new CNN poll that puts another perspective on jobs and incomes. This morning with the data from Feb the poll is under the rug but should be revisited to put a little perspective on this morning’s explosive job growth. “CNN recently ran a poll of citizens and it was yet another bearish outlook from the little people. 75% of those surveyed said they are worried about the economy, with 69% saying economic conditions are not good. Meanwhile, a full 65% believes the country is on the "wrong track."

The gap between high- and low-income groups is the widest it has been in 100 years and the share of U.S. consumers who call themselves middle class has never been lower. The Social Security Administration saying income last year was $2,100 lower than in 2009 and $3,600 lower than in 2001; 50% of all American workers made less than $28,031 a year, while a whopping 39% brought home less than $20,000. The labor participation rate, a key in tomorrow’s employment data, of people in the work force has dropped to 62.7%, matching the February 1978 lows. A remarkable 92.6 million people are not in the labor force.”
What is reality these days? Not sure anymore, neither are economists and pundits or the Federal Reserve. I can paint the picture any way you want, strong growth coming and unemployment down to under 5.0%; or an economy teetering on the edge with most consumers deep in debt and not earning a living wage. The various data points allow for differing interpretations and there is no lack of them. The Fed waking on eggs and now traders worry that the Fed has fallen well behind the curve in terms of moving too late. Interest rates pointing to higher rates that won’t help consumers buying homes.
Equity market investors didn’t like the strong jobs growth; puts the Fed back in play pushing interest rates higher this morning. At 9:30 the DJIA opened down 109, the broader market not so bad; NASDAQ -11, S&P -9. The 10 yr note blew out its support at 2.12%, at 9:30 2.20% and 30 yr MBS price-44 bps. The US dollar is strengthening every day now, against the euro currency moving to parity and that is not a plus for the economy or the US stock market.
The bond and mortgage markets turned bearish on 2/6. Since then we have consistently warned about floating. The initial reaction this morning took the 10 above our last vestige of support when it moved above 2.12% and it is very likely the note will close today above the support setting a move now to 2.30%.

PRICES @ 10:00 AM
10 yr note:                  -26/32 (81 bp) 2.21% +10 bp
5 yr note:                    -15/32 (47 bp) 1.67% +10 bp
2 Yr note:                    -4/32 (12 bp) 0.71% +6 bp
30 yr bond:                 -45/32 (140 bp) 2.80% +9 bp
Libor Rates:                1 mo 0.175%; 3 mo 0.263%; 6 mo 0.395%; 1 yr 0.688%
30 yr FNMA 3.0 Mar:  @9:30 100.97 -44 bp (-36 bp from 9:30 yesterday)
15 yr FNMA 3.0 Mar:  @9:30 104.28 -28 bp (-14 bp from 9:30 yesterday)
30 yr GNMA 3.0 Mar:  @9:30 102.08 -27 bp (-24 bp from 9:30 yesterday)
Dollar/Yen:                120.93 +0.80 yen
Dollar/Euro:               $1.0874 -$0.0156
Gold:                         $1177.20 -$19.00
Crude Oil:                 $49.97 -$0.79
DJIA:                        18,072.79 -62.93
NASDAQ:                  4978.60 -4.21
S&P 500:                   2095.02 -6.24