Jobs Report Restores a Chunk of Bond-Market Wealth

The absence of wage inflation and a stable unemployment rate undid some of the damage of the last two weeks.
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The bond market staged its first big rally in weeks today, triggered by a friendly November

employment report

. But the rally was bigger than the report was friendly.

There were two reasons for that, market analysts said. First, traders were bracing for a stronger-than-expected report, so when it was only mildly better than expected, there was a strong sense of relief. Second, the market had gone down almost every day since Nov. 16, when the

Fed

hiked interest rates and

warned that additional hikes may be necessary. The selling left the market in an oversold condition, from which a rally could more easily spring, analysts said.

The benchmark 30-year Treasury bond ended the day up 24/32 at 98 5/32, trimming its yield 6 basis points to 6.26%. Shorter-maturity notes outperformed, their yields shedding anywhere from 6 to 8 basis points.

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All of the three most important components of the November jobs report were arguably better than expected, even though only one --

average hourly earnings

-- was indisputably better than hoped for. Average hourly earnings rose just 0.1%, vs. an average forecast among economists surveyed by

Reuters

for a 0.3% gain. The year-on-year growth rate eased to 3.6% from 3.7%, quelling concern that the very tight labor market is fostering wage inflation.

The increase in

nonfarm payrolls

, traditionally the most important component of the report, was only a bit higher than the average forecast of 226,000 at 234,000, calming fears that the economy is growing too fast. But paired with a large downward revision to the October gain (to 263,000 from 310,000), and with the fact that traders were bracing for a much larger-than-expected gain, the result was greeted with relief.

By the same token, the

unemployment rate

, while it held steady at 4.1% as expected, had an unusually positive influence. Because the Fed warned so explicitly in its Nov. 16

statement that additional declines in the unemployment rate might provide justification for additional rate hikes, a merely unchanged rate was cause for celebration.

"It was a case where the report was better than the whisper number," said Martin Mauro, financial economist at

Merrill Lynch Government Securities

. "As we worked our way through the week, the expectations just got worse and worse."

"The great thing about the jobs report was that there was no really bad news," concurred Kevin McKenna, head of taxable money market funds at

Merrill Lynch Asset Management

. "Especially after

November

new home sales

being up 16%

yesterday, people were back on the heels of their feet, afraid of another punch that was going to knock us out."

The report doesn't greatly change the likelihood that the Fed will hike rates again early next year, McKenna said. The Feb. 1-2 meeting of the

Federal Open Market Committee

"is very much in play, unless we get some evidence of underlying demand weakening," he said. "I'm not convinced it's going to happen. I think we're going to continue to see a strong economy and low inflation."

But the news greeted a market that had suffered a long string of losses since Nov. 16. Those losses lifted the long bond's yield from 6.03% to 6.32%. "The market was just oversold," said Tom Connor, head of government bond trading at

J.P. Morgan

."We had observed

yesterday that all the technicals, everything, was oversold." The jobs report was "not anything conclusive," Connor said.

But with the next major economic reports -- the

Producer

and

Consumer Prices Indices

-- expected to continue to show inflation running at a relatively low level, traders asked themselves: "'Why should we be pricing in one and a half tightenings by March?'" he said.

The overreaction, Merrill Lynch's Mauro said, was not in today's action so much as it was in the selloff that consumed much more bond-market wealth than was restored.