March Employment Report a Surprise

If I tell you that the March employment report this morning was not much of a surprise to myself – I might be bending the truth a little bit.  Long-time readers of my blog are well aware that employment is always a system shock, especially to myself, as the direction of the misses compared to estimates is a keystone for the BLS data. This time around the misses are supporting more decline in interest rates. The “consensus” for non-farm jobs was an increase, even after on Wednesday markets were given a warning sign when ADP reported less job growth in their original estimates.  What really was the major blow was the massive downward revisions to both the January and February reports.  The job gains in March were the lowest since Dec 2013. The average monthly gain in the first quarter was 197,000, down from an average of 324,000 in the final three months of 2014.  Unemployment remained unchanged at 5.5% as expected.

The reaction sent MBS prices higher and the 10yr note rate lower. The stock market is closed today but index futures trading the main indexes initially traded lower and closed at 8:00AM CST. Today’s report adds more evidence the U.S. economy slowed in Q1.  Consumer spending, business investment and manufacturing output have all pointed to a further slowdown in the first quarter - the first look at Q1 GDP is April 29th, the advance look.

What does the Fed think now about increasing interest rates as soon as June? I am sure they are dumping that idea as I write this.  Will it happen in September as some are expecting? That also is debatable, as I am now not expecting the Fed will increase the FF rate this year, and there are many economists that agrees that today’s data fortifies that view - at least until the April employment report on May 8th, but even a strong report is not likely force the Fed’s hand.

I do not trade on the employment data due to its extreme volatility – and yes, today in hindsight may have left some price gains on the table. Never say never, never say always - a traders mantra, but I would not change my mind. Making guesses on employment is not what I do. If I had floated on the February employment report and the results were MBS prices dropping over 70BPS on March 6th when the data was released, I would have been criticized as well then… but I do love my job.

Technicals are increasingly bullish now as I expect the 10yr note to continue volatility but will work down to test 1.70% and MBS prices up another 50 bps from current levels.