Jobs Report Pleases, Then Scares, Bond Market

The bond market rallied sharply after the release of the September employment report, heartened by the 8,000 decline in nonfarm payrolls, but rapidly sold off when traders got word of a larger-than-expected increase in average hourly wages.

Since then, Treasuries have settled into a range not far from where they began the day, giving strategists time to muse over the presumed weakness in this report. Lately the 30-year bond was down 2/32 to 99 5/32 as the yield rose 1 basis point, to 6.19%.

The Labor Department said job growth would have been about 50,000 had it not been for Hurricane Floyd. Some sources believe that the last two jobs reports (for August and September) evidence a slowing in labor growth, but others were suspicious of payroll declines in seemingly healthy sectors.

"Adding in all that information, there's a very gradual slowing in the pace of hiring," said James Glassman, U.S. economist at Chase Securities. "There's a slight downward tilt and that's a good sign."

The market's initial reaction to the drop in payrolls was to rally. Economists polled by Reuters were expecting a 218,000 gain in nonfarm jobs. Short-term securities -- such as two-year notes -- are still in positive territory, as the decline in payrolls has the market believing this decreases the chances of a Fed rate hike in November. Lately the two-year note was up 2/32 to yield 5.78%.

But the 0.5% increase in average hourly wages spooked the market, heightening fears of wage inflation. The year-over-year rate of wage growth is now 3.8%, compared with 4.1% in Sept. 1998. Estimates were for a 0.3% uptick.

Glassman believes that just as the payroll figure was distorted because of the hurricane, so was wage growth. "Those people that can't show up to work are guys who have to show up to be paid," he said. "The low-paying jobs get dropped out."

Despite whatever payrolls would have been added back in due to seasonal adjustments and Floyd, Tony Crescenzi, chief bond market strategist at Miller Tabak, said he can't make a strong bearish case for this report. "Seasonal factors can bring it up to an as-expected report, but not an outright bearish report," he said.

Economists said seasonal adjustments have caused September figures to fall short of estimates in past years, which happened again this month. But August's payroll gain was revised downward by 21,000 to 103,000, meaning just 95,000 in jobs have been added in the last two months.

Suspicious to Crescenzi was the 21,000 decline in manufacturing, after a 77,000 drop in August. Certain manufacturing indicators, such as the National Association of Purchasing Management's survey of manufacturing sentiment, have shown improvement in employment indicators in the last few months.

Also, retail employment fell by 49,000 after a 21,000 decline in August. "The most reasonable explanation is that we finally are running out of workers," said Bill Cheney, chief economist at John Hancock Financial Services. Employers having a hard time finding workers would need to hike wages to attract qualified candidates. But if wage inflation is a trend, it will take at least one more month of data to interpret.

The weekly workweek fell 0.1 hours to 34.4 hours per week. August's workweek was revised downward to 34.5 hours per week. The unemployment rate was unchanged at 4.2%.

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