Strong Jobs Report Sends Yields Higher

Stocks and Mortgage Bonds are both sharply lower after a stronger than expected BLS Jobs Report.

Unfortunately, the 10-year is moving higher and flirting with the Danger Zone that we had highlighted yesterday at 4.735%. If a break above this level is confirmed, there is not much stopping yields from going to 5%.

BLS Jobs Report

The Bureau of Labor Statistics (BLS) reported that there were 256,000 jobs created in December, which was much stronger than estimates of 160,000. The previous two months were revised lower by 8,000 combined.

Interestingly, the raw figure before seasonal adjustments showed 81,000 job losses, but the figure was adjusted higher to +256,000. Although we saw something similar last year, logically, one would think they would seasonally adjust the numbers lower in December because of seasonal hires, and then seasonally adjust the figures higher in January once the temporary seasonal employees are let go.

The Birth/Death model, which has been a culprit of overstating job growth, was insignificant and had slight job losses, so it was not to blame for the strong report.

Overall, this was a strong Jobs Report, but we do know that the BLS often times overstates job growth and then revises the figures lower in the subsequent two months and then later with the actual data from the QCEW.

There are two surveys within the Jobs report, the Business Survey and the Household Survey. The Business Survey is where the headline job creation number comes from and the Household Survey is where the unemployment rate comes from.

The Household Survey has its own job creation component, and it showed 478,000 job gains. The number of unemployed people decreased by 243,000, while the labor force increased by 243,000. This resulted in the unemployment rate falling from 4.2% to 4.1%. While the unemployment rate decreased, the average duration of unemployment did continue to move higher, showing that once someone is let go, it’s becoming harder to find a job.

The only weak point within the report was the quality of jobs created. The majority of the jobs, 359,000, were from individuals under 24 years of age, with 224,000 coming from the 16-19 year cohort. A lot of those jobs are likely part time and seasonal, as they are still in school. We did not see gains in the prime working age categories.

Most of the jobs were part time, accounting for 247,000 of the job gains. There was a smaller increase of 87,000 for full time jobs.

The one slightly positive area for the Bond market was wage pressured inflation – Average hourly earnings rose 0.3% in December and fell from 4% to 3.9% year over year, which was one tenth beneath estimates.

Bottom line – Today’s Jobs Report was pretty strong on all fronts. Of course it’s susceptible to revisions, but for now the Bond market is selling off and thinking that the Fed may not even be able to cut two times this year. It’s a fluid situation and upcoming data can change that in a hurry, but that is the sentiment for now.

News Next Week

Tuesday: Producer Price Index

Wednesday: Consumer Price Index, Mortgage Applications, Beige Book

Thursday: Retail Sales, Initial Jobless Claims, NAHB Housing Market Index

Friday: Housing Starts and Permits

Technical Analysis

Mortgage Bonds are lower, but off their worst levels. Bonds are testing support at 99.87 – If this level does not hold, the next stop is roughly 20bp lower. The 10-year did break above resistance at 4.735%, but has since gotten back beneath it. This is a key level and if it is broken, the next stop is 5%.