Don't Let Jobs Noise Distract You

The Market Impact

The bond market often gets things right for the wrong reason. The prime error is associating growth with Federal Reserve policy responses, inflation and higher interest rates. Let's state the conclusion first: There are numerous reasons to sell bonds, but someone else getting a job or a raise should not be on that list. But standing in front of a knee-jerk reaction may be a poor way to preserve the integrity of various body parts, as anyone knows who was long 10-year notes after last Friday's personal income data were released.

Let's take two simple and simplified comparisons. The first is the unemployment rate against nominal one-year Treasury note yields. Unemployment peaked at 10.8% of the workforce at the end of 1982, and it has declined for a large number of reasons in the quarter-century since. The recessions of 1990-91 and 2001 interrupted this decline, which has now resumed. What have short-term interest rates, those most sensitive to monetary policies, done over this period? They have declined. The present upturn, like those of the late 1980s and early 1990s, all marked with arrows, scarcely matched the duration or intensity of declines in the unemployment rate.

Does Low Unemployment Lead to High Rates?

Source: Bloomberg

The second question is whether rising employment levels and the pace of those gains lead to inflation. Here we can compare the year-over-year changes in the CPI with those in the establishment survey. If there are any causal connections, I am unable to discern them.

Do Jobs Cause Inflation?

Source: Bloomberg

We are set up for a surprise on Friday, born from the hurricane-produced uncertainties in the labor force. Something will happen, and it could happen in a big way. But should we believe this will induce the Federal Reserve to change its policy, seemingly set on autopilot, of raising rates again in November? No. If they did not back off in September, they will not back off in November.

Will any number cause them to accelerate their rate hikes? Once again, probably not, given the noise in the data.

So without either a policy response or a predictable market outcome from that response, and with no history of these numbers producing major turns in key economic indicators, should you care? For short-term trading purposes, yes; otherwise, no. You will only be trying to close the barn door after the horses have escaped.