Another Weak Jobs Report Should Make Believers Out of Fed Hawks

Stocks are slightly lower and Mortgage Bonds are slightly higher to start the day, following a weaker than expected BLS Jobs Report.

The BLS released data for both October and November, and with the unemployment rate rising from 4.4% to 4.6%, we hoped we would have seen a better reaction in the Bond market. There’s a lot to digest, and we may see that play out over the day, but the report’s details should turn even the most hawkish Fed members into believers that the labor market is weak.

BLS Jobs Report

The Bureau of Labor Statistics (BLS) released their Jobs Reports for both October and November. In October, there were 105,000 job losses, which was much weaker than expected and heavily influenced by government layoffs where individuals took the buyout and were on payroll until September. The November report showed 64,000 jobs created, which was a little stronger than the 45,000 expected.

There were negative revisions to the previous two months: August was revised lower from 22,000 originally to -26,000, while September was revised from 119,000 to 108,000.

The Birth/Death model has been the main reason for the big revisions we have been accustomed to seeing, and in October, added 413,000 jobs. Remember, this is the BLS’ way of capturing small business job gains, but it does a very poor job. The ADP and Revelio Labs Jobs Reports showed the biggest weakness is in the small business sector, so it does not make much sense that they added 413,000 jobs in October. Without that, the job losses would have been over 500,000…we will see this revised out later in the QCEW data.

Looking at the sectors, Government shed 157,000 jobs in October and another 6,000 in November - as previously mentioned the reduction in October was from the Federal layoffs. Health Care continues to be the only sector that is performing, adding 44,000 jobs in October and 46,000 in November, but remember this is not economically sensitive. Without health care, job growth for the entire year would be essentially flat.

There are two surveys within the Jobs report, the Business Survey and the Household Survey. The Business Survey is where the headline job creation number comes from, and the Household Survey is where the unemployment rate comes from. There was no Household Survey for the October report, only November, due to the shutdown. The below changes are therefore from September.

The Household Survey showed that there were 96,000 job gains, but because the labor force increased by 323,000 and the number of unemployed people rose by 227,000, the unemployment rate rose from 4.4% to 4.6%. The exact figure was 4.56%, which was rounded up to 4.6%.

Since July the unemployment rate has gone straight up each month from 4.1% to 4.6%. Many hawkish Fed members disregard the negative job creation figures because they claim that demand and supply of labor is falling at the same time because of immigration, and less jobs are needed to keep the unemployment rate stable. It would be hard to make that argument now that the unemployment rate has gone up every month since July to 4.6%.

The all-in U-6 unemployment rate rose from 8% to 8.7%, which was a huge jump. In fact, it’s the highest level since March 2017 when stripping out the impact of Covid.

The types of job gains underscored the weakness within the report. There were 983,000 full-time jobs losses and 1,025,000 part-time job gains.

Something that should also help Bonds is lower wage pressured inflation – Average Hourly Earnings rose 0.1% in November and fell from 3.8% to 3.5% year over year.

Bottom line – This report was very weak and should help the Bond market as it is digested throughout the day.

Retail Sales

Retail Sales, which gives a read on the health of consumer spending, was flat in October, which was weaker than estimates of 0.1%.

But since this was for October, right after the EV tax credit expired at the end of September, automobile sales had a big impact. When stripping out autos, Retail Sales rose 0.4%.

Looking at Core Retail Sales, which strips out food, autos, gas, building materials, and a few other things, the index rose 0.8%, which was stronger than estimates and shows that the consumer is still spending.

NAHB Housing Market Index

The December NAHB home builder sentiment index, which measures builder confidence, rose 1 point to 39. While this is still in contraction territory under 50, it is the third month in a row of gains and it’s moving in the right direction.

Looking at the subcomponents:

Current Sales: Rose 1 point to 42

Future Sales Expectations: Rose 1 point to 52, still in expansion

Buyer Traffic: Remained at 26, still at weak levels

Technical Analysis

Mortgage Bonds are starting to move higher, testing overhead resistance at the 25 and 50-day Moving Averages. Bonds are starting to break above the aforementioned levels, and if they can maintain the move, have 20bp of room to the upside.

The 10-year is slightly lower but still rangebound between resistance at 4.20% and support at the 100-day Moving Average at 4.15%.