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The employment report contains a mix of information that will lead manyinvestors to conclude that the economy is neither too hot nor too cold -- just right, in other words. This is a fairly rational conclusion to be drawn from the report in and of itself, but the relatively strong pace of job growth seen over the past few months creates risk for the bond market that sets the table for another round of weakness in the weeks to come.

Payrolls expanded by 111,000 in January, 39,000 fewer than expected, but revisions to the prior three months were upward by 99,000, making the data stronger than expected. This aspect of the report is bearish for the bond market, and it's the factor that I believe will affect the bond most of all when the dustsettles.

Initially, though, the bond market will be distracted from this bearish element and focus instead of some of the more bullish elements such as wages, the workweek and the unemployment rate.

Three Factors Helping Bonds

Taking a closer look at these supposed bullish elements starting with the wage figure: Average hourly earnings were reported up 0.2% in January, one-tenth of a percentage point less than expected. In addition, the prior month's 0.5% gain was revised downward to 0.4%.

The figures brought the year-over-year gain down to 4.0% from December's 4.2%, which was the highest level since November 2000 and just 0.2% below the 24-year high of 4.4% set in March 1998 and June 1990. The bond market has been fearful about accelerating wage pressures, so today's figure will calm some of thesefears.

Nevertheless, wages remain lofty relative the 15-year average of 3.2%, so there is nothing here to sustain a bond market rally, particularly given the upward pressure that the continued job growth puts on wages, and the legislative initiative to boost wages.

The length of the average workweek decreased a tenth of an hour to 33.8hours. Although the decrease is small and fits within the normal monthly variability for the workweek, some will see the decrease as bullish for the bond market, because when taken in combination with the benign wage gain, the data indicate that income gains were restrained during the month. Again, I would rather emphasize the payroll trend and the strong trend in personal income.

Also lifting bonds at first is the increase in the jobless rate, which increased to 4.6% from 4.5% in December and the cycle low of 4.4% set in October, which was the lowest since May 2001. Here, too, the overall situation is bearish for the bond market, but the situation for the month is more pleasing to the eyes of the bond market.

Real Estate Sector Boosted

One very bearish element to the bond market of the January payroll report is the lack of any meaningful weakness in the housing-related sectors. While there was likely some amount of influence from the unseasonably warm temperatures that existed in early January when the payroll survey was conducted, the weakness in residential real estate seen thus far has been offset by strength in the nonresidential sector.

In fact, since the peak in February, a decline of 104,000 jobs in the residential specialty trade contractor sector has been fully offset by an increase of 126,000 in the nonresidential sector. This odd fact is probably being influenced by the fact that a fairly large number of homes remain under construction. As homes are completed, the number of people employed in the sector will almost certainly fall.

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Also boosting employment in the residential sector more generally is likely the current effort to reduce home inventories via sales and renting. The amount of property listings is high, and this is likely helping to sustain employment at real estate agencies, property management firms and the like.

Although temporary factors such as the high level of current listings, increased vacancy rates and unseasonable weather are all boosting employment in the downtrodden real estate sector, any future decline that occurs might be less than many now expect. This is primarily because there was a shortage of workers in the sector at housing's peak, particularly in the construction sector, and because of the offsetting influence of the nonresidential sector.

Bernanke Won't Help Bonds


Federal Reserve

is likely to water down the seemingly calming influences on the inflation front related to today's data on wages, the workweek andunemployment, deferring instead to the pace of job creation and other signs of accelerated growth of late.

This means that Fed Chairman Ben Bernanke is likely to give the bond market no new fodder for a rally when he delivers his semiannual monetary policy report to Congress on Feb. 14.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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