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Figuring Out Jobs Report on the Third Try, Bond Market Ticks Up

Treasuries are flat to higher after a mixed May jobs report, with focus immediately shifting to the CPI.

It took three takes before the bond market figured out its collective feelings on today's


report. A knee-jerk, one-point rally ensued after the market saw the paltry 11,000 gain in new nonfarm payrolls in May. This was succeeded by a rapid selloff once the market got a look at the unemployment rate's decrease to 4.2% and the 0.4% rise in average hourly earnings.

Following that, Treasuries have risen and held onto small gains, as retail investors who'd been staying out of the market started buying. Lately the 30-year Treasury bond was up 2/32 to trade at 90 14/32. The yield fell 1 basis point to 5.94%.

Investors weren't expected to buy in the market before the employment report, because a surprisingly strong report -- which has happened often -- would have triggered a massive selloff. Two different analysts today said retail activity is limited, which indicates that many still expect higher yields in the near future.

"The data doesn't provide the impetus for a recovery," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "The conditions that put the market here are still in place: strong growth and some threat of inflation or of a tightening. All of that is still alive, and until the market can be relieved we're not going to look at much of a reversal."

Today's report also doesn't detract from the market's view that the


will tighten interest rates at the upcoming meeting. The bond market was approaching today's report with a fatalistic view: Anything besides exceedingly weak figures is bad news. The market got what it wanted with the payroll figures -- economists had forecast a 216,000 gain in nonfarm payrolls, according to


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. Manufacturing employment fell by 45,000 and construction fell by 40,000.

But the report was strong in almost every other respect, which is bad news for bonds. The household unemployment rate fell to 4.2%, compared to April's 4.3% rate. The total labor force fell by 72,000, so job growth continues to outstrip the growth of the labor force. This worries the Fed, because officials believe the lack of available workers will ultimately result in greater wage pressures than what's being currently felt.

Average hourly earnings rose by 5 cents to $13.19, or 0.4%, higher than the forecasted 0.3% gain. April's increase in hourly earnings was revised up, to 0.5%, from 0.2%.

Though the manufacturing sector continues to lose jobs, the average hourly workweek is increasing. The average manufacturing workweek rose to 41.7 hours in May, compared to 41.6 in April and 41.5 in March. Overtime hours increased to 4.6 hours from 4.3 hours in April.

"I think that's the main message from this report: the increase in the workweek and overtime is suggesting a pickup in demand," said Paul L. Kasriel, chief U.S. economist at

Northern Trust

. Kasriel added that other indicators, such as the continued strength in new home sales and car sales, shows that demand for labor isn't going away. The Fed is "likely to tighten on June 30, as demand continues to put pressure on human resources here."

Despite Kasriel's assertion, today's activity suggests the market is waiting for the June 16 release of May's

Consumer Price Index

, a key inflation indicator, and a speech by Fed Chairman

Alan Greenspan

the next day to determine whether the Fed will hike rates June 30.

"Now the market's thinking, 'CPI, CPI, CPI,' and 'Greenspan, Greenspan, Greenspan,'" said Crescenzi.