The cause and effect relationship between NFP (the “non-farm payrolls” component of the big jobs report) and the bond market is a tale as old as time. The bigger the beat in NFP, the more rates are supposed to rise. The bigger the miss, the more rates tend to fall. So why are rates spiking after NFP came in much lower than expected today? There are several potential reasons, but one of them is head and shoulders above the rest: today’s NFP makes fiscal stimulus more likely in the short term, and fiscal stimulus puts upward pressure on rates!
With the unemployment rate moving down to 6.7% from 6.9%, was today’s jobs report really that bad?
Yes, it really was! The unemployment rate is not the best indicator for the health of the labor market. Unlike the job count, which is an objective survey of businesses’ payroll data covering roughly 45 million workers, the unemployment rate is based on phone calls and paper mail to 50k households and it relies on their subjective answers. In other words, if someone says they’re employed, that’s how they’re counted. More importantly, if someone says they’re unemployed but haven’t tried to find a job in the past 4 weeks, they’re NOT counted as unemployed.
Workers who’ve given up the job search for more than 4 weeks are no longer counted as part of the labor force. Their participation is measured–shockingly enough–by the Labor Force Participation Rate (LFPR). Savvy talking heads will often point out LFPR any time they discuss a change in the unemployment rate. In today’s case, LFPR was down 0.2%. That means unemployment actually held steady with last month’s levels. Apart from the first few months of the pandemic, it’s as low as it has been since the 1970’s.
The lackluster data is even easier to understand when we look at the much more reliable and objective payroll counts. Before the pandemic, payrolls were running in the 180-260k range. As such, unless today’s result of 245k proves to be a massively low outlier, the resurgence of jobs that began after April’s all-time record drop has leveled off.
One may wonder if 245k jobs per month is really that bad. It is and it isn’t. If there was never a pandemic, it would be fantastic. But there was/is a pandemic and it cost us more than 20 million jobs. Even if we account for distorted seasonal adjustments and temporary census hiring, today’s payroll count still falls well short of holding any promise for a quick return to previous levels of employment.
In other words, it reinforces the notion that many of 2020’s job losses will indeed be permanent (though they could be replaced by different jobs in the post-pandemic economy–something we’ll hopefully get to see in 2021. But for now, this is bad.
So if bad jobs reports are typically good for rates, why are rates spiking today?
First off, not all rates are equal these days. Mortgage rates are VASTLY outperforming their typical benchmarks like 10yr Treasury yields. The former remain near their all-time lows while the latter are at their highest levels since March, and close to breaking above 1.0%. That said, mortgage rates will still be higher today, and that doesn’t jive with the jobs report.
The biggest reason for that is fiscal stimulus. The on-again, off-again prospects for a second big stimulus package have been key considerations for the bond market because bonds–specifically US Treasuries–are used to pay for it! From there, it’s simple supply and demand. The more Treasuries the US government issues (i.e. higher “supply”), the lower the prices must go–all other things being equal. And the price of a bond varies inversely with its yield (or “rate”). Long story short, today’s jobs report was weak enough to make traders think that politicians will put aside their squabbles long enough to pass some stimulus before the end of the year. It’s that simple.