Rate Snapshot: October job creation misses expectations

by MPA07 Nov 2014

By David Shirmeyer, CEO at Sigma Research

October's unemployment rate declined to 5.8%; job creation missed expectations. The labor participation rate though was 62.8%, still high. Non-farm jobs +214K, less than 235K expected but September and August revisions added an additional 31K jobs not previously counted. Private job growth was expected +235K increased 209K. Average hourly earnings a little softer than thought, +0.1% with all forecasts of +0.2%. On the initial reaction MBS prices increased a little but on further reflection by 9:00 back to unchanged from yesterday (look below for 9:30 levels). The 10-year note didn’t move much, the yield increased to 2.39% then back to 2.37%, down 1 bp at 9:00 am. Things got better after stocks opened at 9:30.

Average hourly earnings for all workers rose 0.1% in October from the prior month. They were up 2% over the past 12 months, less than the 2.1% median forecast. Earnings are minimal and a reason why consumers are want to spend. Factories added 15,000 workers after a 9,000 gain in September; construction +12K, service sector jobs is where most growth has been occurring, +181K. The U-6 under-employment rate (those who are working part time that want full time employment) declined to 11.5% from 11.8% in September.

N.Y. Fed President Wm. Dudley in Paris today at a Bank of France conference, saying the U.S. has a responsibility to support global stability. He essentially took the blame that the U.S .Fed missed the 2008 financial crisis. “Given the dollar’s role as the global reserve currency, the Federal Reserve has a special responsibility to manage U.S. monetary policy in a way that helps promote global financial stability,”…. “Our actions have global implications that feed back into the U.S. economy and financial markets.”…. “The largest problems that countries create for others often emanate from getting policy wrong domestically,”…. “We failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession,”…. “The U.S. was not alone in this shortcoming, but given our position in the global financial system, we especially should have done better.”

It was a Mae Culpa speech; not sure why he had to say it because everything we do in the U.S. in terms of monetary decisions have always had an impact on the rest of the industrialized world. His remarks are interesting; if it were not for today’s employment data it would have carried more media attention. The meeting was filled with central bankers; Janet Yellen and Bank of Japan Governor Haruhiko Kuroda among them. Mohamad El-Erian was there (ex PIMCO co CEO); “This is a world which places too much of a burden on central banks,”…. “This is a journey, not a destination. If the journey lasts too long, central banks go from being part of the solution to perhaps being part of the problem.” Increasing realization is spreading that the Fed and other central banks cannot heal all problems; a message that is way past due.

After an hour of uncertainty in markets; at 9:30 the DJIA opened -45, NASDAQ -8, S&P -4. The 10 year note jumped on the 8:30 employment data but by 9:30 the 10 traded at 2.35% down 3 bps from yesterday. 3 year MBS price at 9:30 +25 bp from yesterday’s close and +21 bps from 9:30 yesterday.

At 3:00 this afternoon September consumer credit data from the Federal Reserve. As you know it is a report we pay attention to; we are not too interested in overall credit increases but focus on the revolving credit component that measures consumer use of credit cards as a measurement of consumer actions rather than the two consumer indexes reported (U. of Michigan and consumer confidence from the Conference Board).

The October employment report was good, not terrific but not weak, although the job growth was less than expected it was in the wheel house of forecasts and didn’t deviate statistically in any significant way. Interest rates are not moving much; a little better but the 10 is still in an upward trend (see the chart above). Technically, still getting bearish readings; to swing our work to a more positive near term outlook the 10 now at 2.34% will have to close below 2.32% and that is not likely to occur today. The positive reaction today is mostly driven by no negative reaction to employment; it was a slight miss but not enough to enthuse. The reaction so far is some short-covering of positions that had been increasing for the last three weeks.

PRICES @ 10:10 AM

10 year note:                    +13/32 (41 bp) 2.34% -5 bp

5 year note:                      +8/32 (25 bp) 1.62% -5 bp

2 Year note:                      +2/32 (6 bp) 0.52% -3 bp

30 year bond:                   +15/32 (47 bp) 3.08% -2 bp

Libor Rates:                 1-month 0.155%; 3-month 0.231%; 6-month 0.325%; 1 year 557%

30 year FNMA 3.5 Nov:   @9:30 103.38 +25 bp (+21 bp from 9:30 yesterday)

15 year FNMA 3.0 Nov:   @9:30 103.80 +14 bp (+19 bp from 9:30 yesterday)

30 year GNMA 3.5 Nov:   @9:30 104.48 +28 bp (++19 bp from 9:30 yesterday)

Dollar/Yen:                 114.64 -0.57 yen

Dollar/Euro:               $1.2429 +$0.0054

Gold:                          $1152.40 +$9.80

Crude Oil:                  $78.47 +$0.56

DJIA:                         17,530.10 -24.37

NASDAQ:                   4621.59 -16.88

S&P 500:                   203026 -0.95