Signs of a Tight Labor Market Spook the Bond Market
Bond prices fell, lifting some yields to their highest levels in nearly a month, after the October employment report ( definition | chart | source ) depicted the economy as slowing, but not to a degree that clearly calls for the Fed to cut interest rates.
The October jobs report detected a continuing slowdown in the pace of job growth. But it also measured the unemployment rate at 3.9%, the same as in September. That's a 30-year low, and because the Fed sees in low unemployment rates the risk of wage inflation, which can breed price inflation, it is unlikely to lower the
fed funds rate until the unemployment rate rises. The fact that wage inflation, as measured by the October jobs report, outpaced expectations only reinforced the point.
As traders of
fed funds futures pushed the odds of a cut in the fed funds rate by the end of the first quarter back under 50%, the benchmark 10-year
Treasury note lost 19/32 to 99 14/32, lifting its yield 10.8 basis points to 5.825%. Shorter-maturity yields rose by comparable amounts.
The 30-year
Treasury bond lost 1 1/32 to 105 14/32, lifting its yield 7.1 basis points to 5.860%.
And at the
Chicago Board of Trade
, the December
Treasury futures contract gave up 29/32 to 99 1/32.
According to the employment report, the economy added 137,000 new jobs in October, significantly fewer than economists had forecast. Economists polled by
Reuters
had forecast a gain of 184,000, on average.
More importantly, it represented a further slowdown in the pace of job creation. In September, the average pace of payrolls growth over the last 12 months was 205,000. In October, the average pace fell to 195,000.
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But the fact that the unemployment rate held steady even as job creation slowed indicates that some of the slowdown is due to the shortage of workers, as opposed to easing demand for workers.
The 0.4% increase in average hourly earnings -- economists polled by
Reuters
had forecast a 0.3% gain on average -- also argued against the view that demand for workers is easing.
The news disappointed those who were hoping that the
Federal Open Market Committee, at its next meeting on Nov. 15, might shift its
assessment of the risks facing the economy to balanced. At its last meeting, the FOMC assessed the risk of rising inflation as greater than the risk of too-slow growth. Before the committee will cut the fed funds rate, investors believe it will shift to a balanced policy statement.
"There was that sort of hope in the bond market," based on the recent reports detailing weakness in the economy,
Dresdner Kleinwort Benson
senior market economist Kevin Logan said.
Nothing in the report suggests that the FOMC needs to consider hiking the fed funds rate,
Barclays Capital
economist Henry Willmore said in a research note. "However, the FOMC is likely to continue to emphasize that the balance of risk lies in the direction of higher inflation."
The selloff was exacerbated, market analysts said, by the approach of Election Day and the
quarterly refunding. The quarterly refunding takes place on Tuesday and Wednesday.
Bond dealers normally sell bonds ahead of the quarterly refunding to hedge the risk they will take on by buying the new issues. This time around, they refrained from doing so in a big way till after the release of the employment report, in case the report triggered a rally,
IDEAglobal.com
senior bond strategist Josh Stiles said.
The approach of Election Day may also have triggered some selling by investors who believe the outcome will be negative for the bond market. In general, a Bush victory is viewed as negative for the bond market, on the assumption it would lead to smaller budget surpluses, which would mean continued borrowing by the government and upward pressure on interest rates.
Economic Indicators
In other economic news,
factory orders
(
definition |
chart |
) rose 1.6% in September, significantly more than expected. Economists polled by
Reuters
had forecast a 0.9% rise, on average. The annual growth rate of factory orders rose to 7.2% from 4.4% in August.
The report also revised sharply higher the
durable goods orders
(
definition |
chart |
) results reported last week. The increase in overall durable goods orders in September was revised to 3.0% from 1.8%. Excluding transportation equipment, durables orders rose 1.7%, not 0.8% as originally reported.
In a sign that the risk of inflation may be moderating, the
Future Inflation Gauge
(
definition |
chart ) fell to 117.0 in October, the lowest since last October, from 119.2 in September.
Finally, the
Purchasing Managers Non-Manufacturing Index
(
definition |
) fell to 58 in October from 62 in September.
Currency and Commodities
The dollar fell against the yen and the euro. It lately was worth 106.96 yen, down from 108.12. The euro was worth $0.8662, up from $0.8593. For more on currencies, see
TSC's
Currencies column.
Crude oil for December delivery at the
New York Mercantile Exchange
rose to $32.60 a barrel from $32.54.
The
Bridge Commodity Research Bureau Index
rose to 223.49 from 222.49.
Gold for December delivery at the
Comex
rose to $266.20 an ounce from $265.90.
