Today’s April non-farm payroll release showed 164,000 jobs added which was below expectations of 193,000 jobs created and the previous month’s figure was revised up by 32,000 to 135,000. The unemployment rate came in at 3.9% versus the prior month’s reading of 4.1% and the participation rate edged lower to 62.8% from 62.9%. Importantly, average hourly earnings were weaker than expected at 2.6% yoy, and the previous month’s figure was revised down to 2.6% yoy. Broadly speaking, a positive set of numbers for bond markets.
Today’s March non-farm payroll release showed 103,000 jobs added which was below expectations of 185,000 jobs created although this follows a strong report in February where jobs added were revised up by 13,000 to 326,000. Historically, March has tended to come in below consensus and there could be some weather related impact. The unemployment rate was unchanged at 4.1% from the prior month’s reading and the participation rate edged lower to 62.9% from 63%. Average hourly earnings grew 2.7% yoy, a touch higher than last month’s reading of 2.6% yoy.
Most will know we have been advocates for US Treasury curve flattening for an extended period of time and of course the UST curve is very important as it is the benchmark off which all US dollar credit spreads are measured. Since the end of June this year, so a little over five months, the 2- to 10-year benchmark spread has tightened 36 bps and now sits at just 56 bps, while the spread between the 5- and 30-year has tightened 31 bps to just 63 bps, a dramatic flattening of the yield curve. Now we all know the story, the market is clearly not on the same page as the Federal Reserve when it comes to inflation expectations, and with the Fed tightening path; we do expect a further 25bp on the funds rate next week, which is positive for longer-dated bonds as it further reduces the risks of inflation.
Today’s November non-farm payroll release showed 178,000 jobs added which was in line with expectations. The prior month’s reading of 161,000 jobs added was revised down to 142,000. The unemployment rate fell to a nine year low of 4.6% from October’s reading of 4.9% and the participation rate dropped a little to 62.7%. Average hourly earnings was an off setting factor to an otherwise expected and rather neutral report as month on month the -0.1% saw a 2.5% year on year number from the 2.8% previous report.
This data release in conjunction with recent Fed commentary makes a December rate rise almost inevitable with the market been pricing in a 100 percent expectation of an increase in rates. What is more challenging to determine is what a Trump Presidency really means for growth and inflation.
Jobs growth has been one of the strongest data points on the US economy, although we are now questioning whether the weakness seen in the recent data points, particularly the manufacturing sector, is starting to spread to other areas of the economy. This has been evident in broad based indicators such as the Chicago Fed National Activity Index, a composite of 85 monthly indicators where a positive/negative reading corresponds to growth above/below trend, which has remained weak with the December reading at -0.22 and the prior reading revised down to -0.36. While it is not yet at levels indicating a recession it suggests this risk is rising. Even the services sector has started to show some signs of slowdown; earlier this week the January ISM non-manufacturing fell to 52.1 which was the weakest reading since February 2014.
The employment data continues to be one of the stronger data points on the US economy. Today’s non-farm payroll figure showed the US economy added 292,000 new jobs in December which was well ahead of market expectations of +200,000 jobs. The two month net revision of +50,000 jobs was also strong.
Following on from the excitement over the ECB yesterday and disappointment from the limited rate cut, of 10 basis points, combined with the extension of QE for a further six months, the market was primed for today’s Non-Farm Payrolls (NFP) for November. The general feeling here is that the limited action by the ECB should assist the Fed with a rate rise at their December 16th meeting.
On Wednesday Janet Yellen noted in her testimony before the House Financial Services Committee “at this point, I see the US economy as performing well” and that a rate increase in December remained a “live possibility” but remained data dependent. Inflation, despite running “considerably” below the FOMC’s 2% objective, is viewed as reflecting “declines in energy prices and the prices of non-energy imports” and “If we were to move, say in December, it would be based on an expectation, which I believe is justified, that -- with an improving labor market and transitory factors fading -- that inflation will move up to 2 percent.”
So here we are again, Non-Farm Payrolls day, that all important economic release regarding the trajectory of the US economy. A few decades ago it was the US current account and trade balance which was the “big release” but since NFP has been the dominant series. Maybe this is because it is the first indicator of activity for the previous month or indeed that the week following NFP there is almost a vacuum of top tier releases putting NFP as the dominant series to set the tone for the coming weeks.
The August US non-farm payroll data, which is historically quite volatile and very often revised was released with the headline below expectations with 173,000 jobs created against calls of 217,000. However, the revisions to the two previous months was a net increase of 44,000 and so a quite neutral overall outcome. The unemployment rate fell to 5.1% against expectations of 5.2% with the labour force participation rate dropping 0.1% to 62.6% which will be taken as explaining the unemployment rate drop.The most important indicator in the report was a rise in average hourly earnings to 2.2% from 2.1% last time and average weekly hours also increased to 34.6 from 34.5.