Jobs Report Results in Lots of Head-Scratching

Treasuries slog through an uncertain day as most early gains at the long end are given back.
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The muddied, muddled

employment report

produced a similarly confused reaction from the bond market as Treasuries ended mixed in a shortened trading session.

Immediately following this morning's release of the eagerly anticipated jobs data, a euphoric (albeit brief) rally commenced, followed by a whiplash of selling, and several hours of trying to discern what today's release is going to mean for the markets and

Fed

policy in the next month.

The

Labor Department

reported an 8,000 decline in

nonfarm payrolls

in September, adding that a 50,000 gain probably would have shown up had it not been for Hurricane Floyd, which took place the same week as the survey. This made the market jump, but only for a few minutes, as bonds then sold off on the 0.5% increase in

average hourly earnings

, a greater-than-expected increase.

The 30-year Treasury bond rose almost a point before losing most of those gains, and was lately down 7/32 to 99, boosting the yield by 2 basis points to 6.20%. The benchmark bond tacked on 7 basis points to its yield this week, and now sits at its highest yield since Aug. 12. Short-term securities fared better today, with the two-year note finishing unchanged to yield 5.81%.

The

Reuters

consensus estimate called for a 218,000 increase in nonfarm payrolls, and a 0.3% increase in average hourly earnings. Now, the market has an entire month of chewing on this data before the next employment report reveals whether the job market is indeed slowing down while wage growth is picking up -- or if the entire report turns out to be a wash.

"This confusion is likely to be persistent for months to come," said Dana Johnson, head of capital markets research at

Banc One Capital Markets

. "There's an important issue about how much growth is slowing. There's a question as to whether

the unemployment rate will be stabilized at too low a rate, and how much pressure on prices will result."

Judging by the last two months' results, job growth may finally be slowing in a manner more in line with the Fed's wishes. August's payroll growth was revised downward to a gain of 103,000, meaning just 95,000 jobs have been added over the last two months. Some of this can be traced to students leaving work to go back to school: Retail shed 49,000 workers this month.

On the other hand, payroll growth was revised upward in July. If the economy is truly running out of workers to hire, more hourly wage increases could be in store. Wage growth is currently rising at a 3.8% year-over-year rate, which is still slower than last September's 4.1% rate.

Just as Floyd and other seasonal glitches could have distorted payroll figures, the same can be said for average hourly wages. Two economists said low-paying workers were probably the ones that fell out of this survey due to the hurricane, which would boost the wage figure higher.

It's unclear whether, going forward, the Fed will pay more attention to the payroll figures or the wage data. If growth has started to slow, at least in the labor market, a more pronounced surge in wage inflation might be required for the Fed to act a third time this year.

Barclays'

Henry Willmore sees it the other way, passing off the payroll losses to Floyd and other flukes, and focusing on the wage growth. In a comment, he revised his Fed forecast, predicting a Fed hike at the next meeting, Nov. 16, and one in the first quarter of 2000.

Of course, nothing is settled at this point. About a month-and-a-half of releases remain before the next meeting. Next week's calendar, save for Thursday and Friday, is relatively light. September's

retail sales

report will be released Thursday and the important wholesale inflation indicator, the

Producer Price Index

, is scheduled for release Friday.

The PPI is expected to rise 0.4%, while the core rate, which excludes food and energy prices, is forecasted for a 0.3% increase, according to

Reuters

. Two other important indicators,

business inventories

and

industrial production

, also will come out Friday.