Ever wonder how two different kinds of traders can see
the same economic news release, yet come up with wholly differing conclusions
as to what that data means? (Us too).
I refer specifically to Friday’s Payroll Survey data. The
job creation number – headlined at 262,000 newly created jobs – was the first robust
report in a very long while. Equity traders took note of this, interpreted the
data as Bullish for the economic recovery – and the markets were promptly off
to the races (albeit on light volume).
On the other hand, Bond markets sold off as traders saw
the data as inflationary – for about 30 seconds. They then had a smart about-face,
and Bonds rallied all day long, driving rates lower. That leads us to conclude
that Bond traders believed the data was benign, and not supportive of
About now, you should be wondering how the same data could
support a thesis of robust expansion yet not be inflationary. It is hardly a conundrum.
Before you start having thoughts of Goldilocks Economy!, allow us to
disabuse you of that notion.
Drilling beneath the headlines, the report was far less
bullish. We note 3 specific issues:
· The unemployment rate ticked up, from 5.2 to 5.4%;
· Average hourly wages were unchanged;
· Long-term unemployed (27 weeks+) remained at 1.6m;
· Persons holding more than one job increased by 432,000
to 7.7 million, 5.5% of total employment. That’s up from 5.3% a year earlier.
These suggest to us that the labor market still has plenty
of slack left in it. Unlike the commodity markets, we see little inflationary
pressures in the labor market: no wage pressures, long-term unemployment,
and an increasing number of multiple jobholders.
We suspect this is what was motivating the bond traders
who rallied the fixed income markets Friday. It is not quite deflationary, nor
is it inflationary.
What does this mean to the rally that began March 2003?
It is now two years old, and we see no sings of dangerous expansionary pressures.
At best, the economic risks remain balanced.