Employment Situation Disappoints. Mortgages Rally

You can exhale. Jobs data was even weaker than recently downgraded forecasts. Bonds are rallying, recovering almost all of yesterday's sell-off already....

(Reuters) -Employment growth brakes sharply in May: Employment rose far less than expected in May to record its weakest reading since September, while the jobless rate rose to 9.1 percent as high energy prices and the effects of Japan's earthquake bogged down the economy. Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000. Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated. The job creation slowdown confirmed the economic weakness already flagged by other data from consumer spending to manufacturing. It could stoke fears about the depth and duration of a slowdown that started early in the year. The Labor Department said severe weather last month, including tornadoes and flooding, in the Midwest and the South did not materially affect data collection. It also said that while some workers in those regions may have been temporarily displaced from their jobs, it found "no clear impact of the disasters on the national employment and unemployment data for May." Economists still believe the lull in activity will be temporary. They cite high gasoline prices, bad weather and disruptions to motor vehicle production because of a shortage of parts from Japan as factors weighing on growth.

RTRS - U.S. MAY NONFARM PAYROLLS +54,000 (CONSENSUS +150,000) VS APRIL +232,000 (PREV +244,000), MARCH +194,000 (PREV +221,000)

RTRS - US MAY PRIVATE SECTOR JOBS +83,000 (CONS +175,000), APRIL +251,000 (PREV +268,000)

RTRS - U.S. MAY GOVERNMENT JOBS -29,000 VS APRIL -19,000 (PREV -24,000)

RTRS - U.S. MAY JOBLESS RATE 9.1 PCT (CONSENSUS 8.9 PCT) VS APRIL 9.0 PCT (PREV 9.0 PCT)

RTRS - U.S. MAY AVERAGE HOURLY EARNINGS ALL PRIVATE WORKERS +0.3 PCT (CONS +0.2 PCT) VS APRIL +0.1 PCT (PREV +0.1 PCT), TO $22.98 VS APRIL $22.92; MAY YEAR-ON-YEAR EARNINGS +1.8 PCT

RTRS - U.S. MAY AVERAGE WORKWK ALL PRIVATE WORKERS 34.4 HRS (CONS 34.3 PCT) VS APRIL 34.4 HRS (PREV 34.3); FACTORY 40.6 VS 40.4, OVERTIME 3.2 VS 3.2

RTRS - U.S. MAY FACTORY JOBS -5,000 (CONS. +14,000) VS APRIL +24,000 (PREV +29,000)

RTRS - U.S. MAY GOODS-PRODUCING JOBS +3,000, CONSTRUCTION +2,000, PRIVATE SERVICE-PROVIDING JOBS +80,000, RETAIL -8,500

RTRS - U.S. MAY AGGREGATE WEEKLY HOURS INDEX FOR ALL PRIVATE WORKERS +0.1 PCT VS APRIL +0.5 PCT

RTRS - U.S. MAY NONFARM PAYROLLS WEAKEST SINCE SEPT 2010 (-29,000); JOBLESS RATE HIGHEST SINCE DEC 2010

RTRS - U.S. MAY PRIVATE SECTOR JOBS WEAKEST SINCE JUNE 2010 (+65,000)

RTRS - SEVERE WEATHER IN MIDWEST, SOUTH DID NOT MATERIALLY AFFECT DATA COLLECTION FOR MAY EMPLOYMENT REPORT--LABOR DEPT.

RTRS - WHILE SOME WORKERS LIKELY DISPLACED DUE TO STORMS, NO CLEAR IMPACT ON JOBS PICTURE SEEN IN MAY--LABOR DEPT.

Plain and Simple: Payroll growth in May was way-weaker than expected at +54,000 jobs. April was revised worse by 12,000 jobs and March was reduced by 27,000 positions. The unemployment rate rose to 9.1% as the labor participation rate was unchanged and the number of people who said they were now "employed" was less than the number of people who said they were "unemployed" in the household survey (BETTER EXPLANATION). Here is the ugliest stat of all: The number of people who've been jobless for longer than 27 weeks increased by 361,000 to 6.2 million, which equates to 45.1% of the unemployed.  That said, it's easy to see why economists are slashing their 1st and 2nd quarter GDP projections. We needed at least 200,000 jobs created every month just to reach 3% GDP projections, five months into 2011 the economy is only averaging 156,600.  There were a few bright spots though. Folks who have jobs in private industry saw their hourly earnings rise by 0.3%. The same amount of hours worked at a higher wage = better weekly earnings to offset rising food and energy costs.  Last but not least,  the labor force grew by 272,000. This implies people are re-entering the jobs market because they believe they might have a better chance at finding work. Could just be college kids coming home from school though.

Market Reaction..

Loan pricing will improve today after bond markets reacted favorably to weak labor market data this morning."Rate sheet influential" MBS coupons are +11/32 at 101-05, recovering a big chunk of the price declines experienced yesterday. The move in mortgages is being led by a flattening yield curve,  benchmark TSYs have broken back into the 2.00% handle. 10s are currently +18/32 at 101-12 yielding 2.966% (-6.6bps). Stocks are getting punished in the process. S&P futures are -1.00% at 1299.50. S&Ps haven't been this low since April 18th.

Based on this reaction loan pricing should improve by 25 to 35 bps.

THE BOND MARKET IS REPEATING HISTORY! <---MUST READ