Markets have cheered the latest jobs report as payrolls came in better than expected at 165,000 in April and unemployment rate fell to 7.5 percent. The stock market rallied while the bond market witnessed a sellout Friday.
Bond markets were pricing in a slowdown due to the federal spending cuts in the US and investors were mostly long bonds due to a recent spate of weak economic numbers. Friday’s jobs number came as a pleasant surprise for the markets, feels Priya Misra, head of US rates strategy at the Bank of America.
The employment to population ratio went up while labor force participation rose in April, indicating people are not leaving the labor force. Markets, however, chose to ignore the decline in work hours. The so-called sequester has not led to layoffs but furloughs, resulting in a drop in total hours worked. Also, consumer sentiment is not very strong and hence rates are unlikely to move higher from current levels. Friday’s jobs numbers, in essence, took care of the spate of recent weak data points, she observed.
The latest unemployment rates showed a decline because they were based on the U3 unemployment measure, noted Komal Srikumar of SriKumar Global Startegies. However, the U6 unemployment measure, which is a more comprehensive gauge of joblessness, actually went up in April to 13.9 percent from 13.8 percent in the prior month.
The decline in the average workweek and a rise in U6 unemployment rate show a lower overall unemployment rate because of the weakness in the job market. Additionally, wages have increased 0.2 percent month-on-month in April, capping the year-on-year rise at 1.9 percent, which is insufficient to drive GDP growth.
Also, data released Friday non-manufacturing ISM number slipped last month while factory orders fell sharply in March, indicating the overall recovery has been extremely weak, he pointed out. Markets appear to be ill-equipped to interpret such data, Srikumar observed.
Asked if Srikumar’s interpretation of the job report is correct, Priya said she agrees to the points raised by Srikumar. Consumer spending is a concern since wage growth has been weak. If the labor market was indeed healthy, the wage inflation would have been higher. However, Friday’s bond market selloff was triggered by better-than-expected unemployment number because it showed the economy created more jobs than estimated, she noted.
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