Bond-Market Take on Jobs Report May Hinge on Stocks

The bond market's response to the December employment report -- which will be released tomorrow at 8:30 a.m. EST -- may ultimately depend less on the report itself than on the stock market's reaction to it.

Most economists seem to think that for a variety of reasons, the December edition of the jobs report -- the ne plus ultra economic indicator -- is likelier to surprise on the strong side than on the weak side. Normally, that would trigger a selloff in the bond market. Bond prices would fall, sending yields (market interest rates) higher, as traders built in a greater likelihood that the Fed will hike the fed funds rate (the official interest rate) at least once to cool the red-hot economy.

A bond-market selloff may indeed be the initial reaction to a stronger-than-expected December jobs report, Lehman Brothers senior economist Ethan Harris says. But if the rising bond yields send stock prices tumbling, bonds could rebound. So far this year, that's been the dominant pattern: Rising stock prices hurt bonds, while falling stock prices help them. The logic? Rising stock prices help propel economic growth by sustaining a fast rate of consumer spending, while falling stock prices chasten consumers.

"It's a focus we think makes sense in that the stock market has become more and more of a driver of the economy," Harris says. Lehman Brothers estimates that a given percentage increase in stock prices has twice as large an effect on consumer spending than it did five years ago. ...