By Carlos Guillen
After an intense focus on the jobs backdrop, investors desperately took a look at the government jobs numbers presented today and got much more clarity on the matter. The good news is that many more than expected jobs were added to the economy; the bad news is that many more than expected jobs were added to the economy ... Huh?
Well, so far for the past month, while investors do want the economy and employment to improve, they have also become hooked to the expectation of easy monetary policy from the Fed. This easy money has been one the main drivers of stock markets for quite some time now, so it has become like a drug for investors, and any indication of an end to this easy money puts investors into a withdrawal symptom mode. So while the employment data was encouraging on the surface, it has sharply increased the chatter of the Fed beginning tapering actions sooner rather than later.
According to the latest data from the Department of Labor, the unemployment rate in June was 7.6 percent, landing in-line with the Street's consensus and remaining flat from the 7.6 percent posted for the prior month. While there was not an improvement in the rate, the economy was able to at least withstand the increase in population. The household survey showed that while the population increased by 189,000, 160,000 individuals were able to find work. In essence, the jobs market was able to employ a large majority of the incremental population. However, we should also note that while the unemployment rate was unchanged, the rate was sustained by a rather sharp increase in the number of part-timers; in fact, individuals working part-time for economic reasons climbed by 322,000 in June. If we include "Part time for economic reasons" of 8.23M and "Marginally attached to the labor force" of 2.58M to the unemployed number, we calculate an unemployment rate of 14.3%, which increased from May's figure of 13.8%.
Clearly the most surprising aspect of the jobs data was that non-farm payroll employment in June (derived from the establishment survey) increased by much more than expected, and May's level was revised higher. The report showed that the increase in non-farm payrolls was 195,000 while the Street's consensus called for a gain of 166,000. Moreover, the non-farm private payroll gains were 202,000, also landing above economists' forecast of 180,000. This result was also higher than that presented by ADP this past Wednesday, which landed better than Street estimates. According to ADP, non-farm private sector jobs increased during June by 188,000, higher than economists' average forecast calling for a 150,000 increase. The fact that the ADP figure surpassed expectations by such a large margin, coupled with today's much better than expected gain, is serving to increase discussions that the Fed may begin to reduce its bond purchases sooner than previously thought.
In all, the June unemployment data appears to have been much better needed; that is, a bit outside of the goldilocks region that most on the Street were hoping for in order to keep the Fed's easy money flowing. However, next month it is likely that as more people become encouraged to join the work force, we can certainly expect to see the unemployment rate worsen, and this may set the data back into the goldilocks region investors so desperately want.
By David Urani
I'm not always an advocate for the way the market acts, but traders will do what they do and it's something that must be addressed. Today it's the employment report which certainly was a welcome result at 195k nonfarm jobs created for June. Of course, these days there is a sizeable contingent who seem to believe that the Fed is more important than economics. And on that note, this strong employment number is out of that "goldilocks" zone that traders want to see, not too hot and not too cold. This would be in the "too hot" category and thus people are now going to be a little more worried about that precious QE money slowing sooner rather than later.
Likewise, there's been some volatility in the market today and at one point we even dipped into the red for a moment. Seemingly that action was driven by those who think Ben Bernanke is more important than the job market (some of it may be driven by tension in Egypt as well). The way I see it, for the past month there's been a lot of noise in the market because of the Fed but it's best not to let the action get to your head. What's important today is we got a strong job number and if the Fed decides it wants to slow down then it's because the economy looks strong enough for it.
Subsequently, treasury yields continue to trade in volatile fashion. Just take a look at the 10-year yield, which immediately popped to 2.7% today from 2.5% on Wednesday. And that's all the way up from 1.7% in May.
With respect to Fed speculation, there is a tangible affect in the form of interest rates. Obviously those treasury yields are a basis for loan rates. Thus, housing stocks are once again seeing a panic sell with the Dow Jones US Home Construction Index down more than 4% on the day. That said, homebuilders and housing economists so far have said that the rising rates have only spurred buyers to dip into the market more quickly to catch the still relatively low mortgage rates while they can.
Nevertheless, the broad market has managed to come back solidly into the green as justified by the job numbers. But keep in mind the "good news is bad news" crowd is going to continue to be prevalent; likewise don't be surprised to see the market try to push higher from time to time on bad news for the same reasons.