Payrolls grew by 156k in September, 16k less than expected and the prior two months were revised down by 7k. But, the private sector gains were more in line with the estimate as they grew by 167k vs the forecast of 170k and the two prior months were revised up by 14k. Thus, the private sector portion we can say was better than expected when blended with the revisions. With a gain of 354k jobs in the household survey vs the labor force increase of 444k raised the unemployment rate by one tenth to 5%. Positively, the 25-54 age range saw a gain of 334k as this has been a portion of the population where some have gone missing from work. Job gains for those younger than 24 yrs old fell and higher minimum wages are not going to help their 1st time job prospects. The participation rate did tick up by one tenth to 62.9% but the U6 all in unemployment rate held at 9.7%. The workweek rose back to 34.4 which is where it stood for 6 months before it fell to 34.3 in August. Average hourly earnings were up by .2% m/o/m and 2.6% y/o/y, the same decent but lackluster trend. Average weekly earnings were up 2.3%. A job gain of 23k in the construction space offset a 13k decline in manufacturing which followed a drop of 16k in the month prior. Services saved the day again.
Bottom line, the initial market response (stocks up and bonds up) focused on the headline miss but looking under the hood saw a slightly better private sector job gain that should clinch a rate hike by yr end (assuming no surprises from here). As the Fed claims they are apolitical, they have all the ammunition (in their minds) to raise rates and should therefore do so in November if they are so inclined to hike again by yr end. Why wait if that’s what you want to do? The 3 month private sector job gain is now 177k vs the 6 month average of 153k, the 12 month average of 192k and vs 221k in 2015 and 240k in 2014. Thus, the slowing trend is clear but is typical of labor activity at this stage of the economic cycle. There are 94mm people of working age people that are not working which provides a pool of supply but they are only coming back at a snail’s pace. Either way, rates should not be at .375% eight years into an expansion but on the other hand the Fed is stuck raising rates with economic growth at just 1.5%.
The 10 yr yield is 1.73% in response and as stated many times it stood at 1.75% on the day of the UK vote. In the UK, their 10 yr gilt yield is now up 8 bps. I’ll repeat my belief that global bond yields bottomed in July and we may never see those levels again in most of our lifetimes.
The pound had a wild night with this intra evening plunge but even with the bounce back its still down 2% vs the dollar and euro:
At some point the import inflationary pressures start to build quicker than modeled and what will the BoE do then? There is tolerant weakness in one’s currency and then there is dangerous and the market is looking at the latter today. As the UK depends on the kindness of strangers in terms of funding, the weaker pound is slamming Gilts with the 10 yr Gilt yielding spiking by 8 bps to .95%. It’s now up 20 bps on the week and at the highest level since June 29th, just a few days after the UK vote. On the day before the Leave vote the yield stood at 1.37%. Thus the yield is currently still very low but one cannot ignore the violence of the move this week and in the face of BoE QE too. In sympathy, the German 10 yr bund yield is back above zero and the US 10 yr yield was knocking on 1.75% again. The export dependent FTSE 100 loves the pound weakness as its up 0.7% but the domestically heavy FTSE 250 down 0.7%
After yesterday’s better than expected German factory order figure, industrial production for August also beat. It rose 2.5% m/o/m after a 1.5% drop in July and well more than the estimate of up 1%. French IP also beat expectations because of an improvement in manufacturing. Spain did too. The euro though is weaker as dollar positioning is firming up ahead of the payroll report and growing belief that the Fed may actually raise rates again. UK IP though missed estimates as manufacturing production rose by .2%, half as expected and the pound took another handle lower after it was reported.