Finding Nothing New in Jobs Report, Yields Idle

A rise in the unemployment rate neutralized a bigger-than-expected rise in payrolls.
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Treasury prices ended a holiday-shortened session very slightly higher after the release of the June

employment report

, which had almost no effect on the even odds that the

Fed

will hike rates again next month.

The benchmark 30-year bond finished up 2/32 at 89 18/32, its yield unchanged at 6.01%. Shorter-maturity notes were likewise little changed.

On Wednesday, the Fed hiked the fed funds rate, the key short-term interest rate, to 5% from 4.75% on Wednesday, and dropped its official inclination to raise rates. But at the same time it warned that "in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth."

Bond traders were looking to the jobs report for information that might get the Fed off the fence. But it contained nothing of the sort. For every indication that the economy is growing too quickly for the Fed's comfort was an indication that the fast growth isn't translating into wage pressures.

Nonfarm payrolls

grew by 268,000 in June, vs. an average forecast of 220,000 among economists surveyed by

Reuters

. And while that's an above-trend number (nonfarm payrolls gained an average of 226,000 jobs a month in the last 12 months), traders were relieved that it wasn't accompanied by a large upward revision to the very weak May numbers. To the contrary, May looks even worse now. Its 11,000 gain in nonfarm payrolls was revised to a 5,000 loss.

And while

average hourly earnings

, forecast to rise 0.3%, rose 0.4%, the May increase was revised to 0.3% from 0.4%. The year-on-year pace of average hourly earnings rose from 3.5% to 3.7%, but it's still well below its April 1998 peak of 4.4%.

Plus, the unemployment rate backed off its 29-year low of 4.2% to 4.3%, easing fear that a tightening labor market will prompt the Fed to hike again.

The cumulative effect of all those numbers was nil. Or, as

Merrill Lynch

senior economist Marty Mauro put it: "Whoever at the Fed was inclined to tighten is still inclined to tighten based on wages and the payroll increase, and whoever was not inclined to tighten is still not inclined to tighten based on the unemployment rate rising."

The report "was a good one for the economy, but it was not overwhelming in its strength,"

Daiwa Securities

chief economist Michael Moran said in a research note. "It did not suggest that the Fed needs to follow up with another tightening in the near term, but it showed that the economy is performing well and kept open the possibility of further Fed tightening this year."

Now, traders are settling in for a week in which many of them will probably go on vacation. There's almost nothing on the domestic calendar with the potential to reprice the bond market. Not so the following week, when the

Producer

and

Consumer Price Indices

and the

retail sales

report, all for June, will command attention.

"Next week would be a good week to take off," said Maryann Hurley, a trader at

D.A. Davidson

in Seattle.

It would be a great week to take off if not for the release on Monday of the

tankan

, the

Bank of Japan's

quarterly survey of business sentiment. While at the end of the day it's still a foreign economic indicator, and therefore less important in the Fed's book, a stronger-than-expected report could whack the bond market by whacking the Japanese bond market (U.S. yields would rise in sympathy), and by feeding the sense that the Japanese economy has finally turned the corner.

"It would be another thing suggesting that the global situation is better, and to the extent that demand is improving in Japan, commodity prices could start to rise, feeding inflation pressures," Mauro said. By the same token, a weaker-than-expected tankan could push Treasury prices higher, he said.

It's also possible, Hurley added, that if a stronger-than-expected tankan triggers a yen rally, prompting another round of yen selling by the

Bank of Japan

so that the prices of Japanese exports don't rise too much, dollar proceeds could be parked in short-maturity Treasuries, boosting their prices. "It would need to print as a very strong number to have a negative effect on us," she said.

Economists surveyed by

Reuters

forecast a tankan reading of negative 36, up from negative 47 in March, which was the first rise in more than two years. Zero is breakeven.