Rates flat as jobs report provides a mixed bag

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Published Date 12/7/2018

The November employment data this morning provided a mixed bag. The unemployment rate remained unchanged at 3.7%, non-farm jobs were thought to be 190K but reported up only +155K, private jobs expected +183K but were reported up +161K, and October NFP jobs revised to 237K from the 250K initially reported. The labor participation rate of 62.9% stayed unchanged from October but was expected at 62.8%. Manufacturing jobs were expecting a +16K increase but increased by 27K. October manufacturing jobs revised lower to 26K from 32K reported. The key average hourly earnings were up 0.2% against forecasts of +0.3%; yr/yr earnings at 3.1% with estimates at 3.2%. Fewer jobs, no increase in earnings initially kept the bond and mortgage markets unchanged.

Non-inflationary strength is the indication from the November employment report, as payroll growth proved favorable and moderate and wage pressures modest. The year-on-year rate for earnings held unchanged at 3.1%, again on the low side of expectations. Trade and transportation, where capacity stress has been elevated, added a very strong 53,000 jobs with professional and business services up 32,000 — solid but still low for this reading to suggest that the scramble to find full-time employees may be easing.

Before the employment report at 8:30 am ET stock indexes were lower, finding support in lower job gains (less concern over Fed increases). We still believe the Fed will increase the Federal Funds rate in 11 days at the FOMC meeting and think the Fed will not be as aggressive with the 2019 rate increases that were widely expected just two weeks ago. Still, there are some continuing to look for three more increases. “The report is not soft enough to deter a December rate hike but it will contribute to a downward revision in central bankers’ policy guidance for rate hikes in 2019,” ….“In terms of a snapshot for the economy, and while somewhat softer than consensus expectations, this is a solid November jobs report that goes counter to talk of recession,” said Mohamed El-Erian, chief economic adviser at Allianz.

By 9:30 am the DJIA opened down -30, the NASDAQ dropped -27, and S&P lost -4. The 10-yr 2.89% added +1 bp.

OPEC completed a deal to cut output, resulting in a larger cut than oil traders were expecting. Crude is trading higher this morning. They struck an accord to remove 1.2 million barrels a day of crude from the market, with non-OPEC allies including Russia taking a 400,000 barrel-a-day share; Iran was granted an exemption from curbing its output due to U.S. sanctions, which have already sharply reduced the nation’s oil shipments.

The Dec mid-month University of Michigan sentiment index was thought to be 97.4; the index was 97.5. October inventories, expected to add +0.7%, increased 0.8%, but sales declined 0.2%.

The interest rate markets are exceptionally over-bought, as we have been noting. We should see rates increase in the very near term. The wider technical outlook is still positive and can remain positive until the 10-yr moves above 3.00%. Yesterday the 10 at one point fell to 2.82% the lowest level since mid-August, a critical technical resistance level. It was unable to break through, and the 10 ended yesterday at 2.88% although MBS prices did hold well.

Source: TBWS

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