Following the March employment report, investors must now question the extent to which the factors that recently drove Treasury yields higher might have changed. Despite the weak report, the only reasonable conclusion is that very little has changed and that the upward trend in yields remains intact.

Over the past year, payrolls have grown by 178,000 per month. The six-month average is 174,000 and over the past two months, payrolls have increased by an average of 176,500. Get the picture? Based on these data, it appears that very little has changed and the

Federal Reserve

is likely to look at the March employment report in this context and continue to raise interest rates when it meets on May 3.

Investors are best advised to keep in mind this simple notion: If payroll growth of 178,000 per month was enough over the past year to spur an acceleration in inflation and hence a rise in interest rates, then the recent trend in payroll growth also should be enough to spur an acceleration in inflation and a continuing rise in interest rates.

The opposing viewpoint would counter that job growth is not strong enough to boost the inflation rate, but this viewpoint is weakened by recent trends in the inflation data. For example, it is notable that core producer prices are now up 2.8% vs. a year ago, matching the high set in 1995, which was the highest level since December 1991.

In addition, core consumer prices are now up 2.4%, the most since May 2002. Still further, the deflator for personal consumption expenditures minus food and energy recently posted its biggest monthly increase since December 2002, and it has increased at a 3% pace over the past two months.

Jobless Rate to Play Well on Main Street

Job growth remains strong enough to drive the jobless rate lower over time, albeit slowly. This is evident in the reported decline in the unemployment rate, which fell to 5.2% in March from 5.4% in February, matching its lowest reading since October 2001. That decline will play well on Main Street, which could use a bit of good news these days in light of the recent jump in energy costs, the decline in stock prices and the rise in interest rates.

The U.S. unemployment rate stands in stark contrast to the jobless rate in Europe, particularly in nations such as Germany, which saw its unemployment rate reach a post-World War II high of 12% in March, and France, where the unemployment rate is now at a five-year high of 10.1%.

Sources of Job Weakness

As for some of the other details of today's jobs report, it is notable that the manufacturing sector lost 8,000 jobs despite continued high readings in the Institute for Supply Management's (ISM) monthly purchasing managers index. The ISM reported today that its index fell to 55.2 from 55.3 in February, a level that is historically consistent with economic growth of 4.5%. Although the ISM's employment component fell to 53.3 from 57.4 in February, it remained well above the average of 47.5 seen during the 1990s expansion.

Another area of weakness was in retail jobs, where 10,000 jobs were lost following an above-trend gain of 39,000 in February. The two-month trend underscores the importance of averaging the February and March job tallies, as February's 39,000 retail gain was triple its six-month average. Interestingly, the weakness was largely due to a decline of 6,800 in employment in building material and garden-supply stores, an area that has fared well over the past year. It has added 64,000 jobs, an increase of close to 6%.

The weakness in seasonal jobs such as building material and garden supply stores might support skeptics of today's "weak" employment report who believe that faulty seasonal adjustment factors might have brought down the job tally. Proponents of this view can point out that employment actually increased 817,000 before seasonal adjustment and that the gain would have been even larger if not for the early survey date, which ended during the pay period ending March 12, which was the earliest possible date. Given that employment tends to increase sharply in March in weather-sensitive industries, the early survey date could well have had an impact on the payroll count despite the government's efforts to smooth such an influence.

Today's payroll report probably won't have much impact on upcoming policy decisions from the Federal Reserve, except to the extent that it diminishes the odds of 50-basis-point rate hikes. Nevertheless, similar to the implicit message in the market response to today's data, the prevailing view at the Fed is likely to be that the conditions that brought about the recent acceleration in inflation haven't changed much and won't until the demand for goods and services begins to lessen and/or productivity gains rebound from their recent dip.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. He appreciates your feedback and invites you to send it to

tcrescenzi@thestreet.com.

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