The December Employment Report at 830am this morning was stronger than consensus estimates. December unemployment expected at 8.7% fell to 8.5%, the lowest level since February 2009 when it was 8.3%. Non-farm jobs expected +155K, jumped to 200K; non-farm private jobs thought to be 160K increased 212K. Yesterday ADP reported 325K private jobs. December average hourly earnings, as usual was up 0.2%. The initial reaction sent the 10-Year Note to 2.03% and mortgage prices fell 8/32 (.25 bp); stock indexes rallied and stocks in Europe were boosted. At 900am the DJIA futures were up +37, the 10-Year Note fell back to 1.98% (-1 bps) and mortgage prices +1/32 (.03 bps). Employers added 1.64 million workers in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009. Annual benchmark revisions to the household survey showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years. It still marked the worst three-year period since 1939 to 1941.
The reaction to the stronger Employment Report sent the 10-Year Note to 2.03%, above its 20-day and 40-day averages;it lasted about five minutes before it moved back to unchanged then turned positive. mortgages also held nicely on the data. Stock indexes didn’t show much enthusiasm either, after a knee jerk improvement the key indexes fell back to pre-employment levels. The same scenario in Europe’s markets; a bounce on the data, then retreating to earlier levels.
At 930am the stock market opened generally unchanged,losing all the initial gains on the Employment Report. The 10-Year Note held a 4/32 price improvement at 1.98% (-1 bps) from yesterday’s close; MBS prices +1/32 (.03 bps). While the Employment Report was better than expected, there was weaker data out of Germany. Europe’s confidence in the economic outlook fell to its lowest position in more than two years and German factory orders plunged as the euro area’s leaders struggled to contain a worsening fiscal crisis and global demand weakened.
The take away this morning on the reaction to the better than expected Employment Report in the stock and bond market is that Europe remains the critical focus for traders. With no inflation fears as the U.S. job market improves, and the Federal Reserve is on record to keep rates low for the next year or so, Europe’s debt problems and the economic outlook worsening is still the dominant force in the financial markets.
The New York Federal Reserve President William Dudley also added to the strength in the bond market this morning saying more monetary accommodation is appropriate even after a report showed the economy added more jobs than forecast last month, ”Implementing such policies would improve the economic outlook and make monetary accommodation more effective” (said today in a speech to bankers in Iselin, New Jersey). At the same time, it’s “appropriate” for the Federal Reserve to consider steps to ease monetary policy, he said.
Technically the 10-Year Note once again held near-term bullish levels. Given that the markets ignored the better jobs data and the decline in the stock market today, the rest of the day should hold well and possibly improve more if equity markets continue to fall as they have been doing since the open at 930am. That said, we don’t expect any significant improvement in interest rates; next week Treasury will be back auctioning $66B in 3-Year Notes, 10-Year Notes, and 30-Year Notes and Bonds.
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