MBS Live Recap: The Fairly Logical Story Behind Today's Rates/Jobs Paradox

The Employment Situation (aka the jobs report, or simply, "NFP") is the granddaddy of all economic reports.  Through the years, no other piece of data has mattered more to bond markets or had a bigger effect on average.  With near-clockwork-like regularity, big beats push rates higher and big misses push rates lower.  

So why in the world did today's HUGE miss cause rates to spike to the highest levels in months this morning?!

The most obvious answer is that the payroll counts are being disregarded due to the weather effects.  Simply put, employers didn't add nearly as many jobs as expected  because many parts of the country had more pressing matters to deal with thanks to Harvey and Irma.  But that alone wasn't enough to explain today's early rate spike.

It's only when we look deeper into the other parts of the report that the reaction starts to make sense.  First off, there's the unemployment rate.  While this is a commonly recited number on the evening news, it's never much of a market mover compared to payroll counts.  But with payroll counts admittedly distorted this month, and the the Labor Department specifically noting an absence of distortion in the data collection underlying the unemployment rate, it took on new importance.

That ended up being bad for bonds because unemployment fell to an impressive 4.2% versus 4.4% expectations.  Normally, this would be explained away with a falling labor force participation rate, but that moved HIGHER this time, and not by its typical modest 0.1% increment.  In other words, the unemployment rate was unequivocally lower.

The hits didn't stop there for bond markets.  The jobs report also measures wages.  For only the 2nd time since before the financial crisis, wages grew at a 0.5% pace, further adding to a gentle uptrend that's been in place for a few years and a sharper uptrend over the past few months.  Although we haven't quite made it to the time where rising wages will turn the gears of inflation (and thus, higher rates), scholars and--to some extent--logic assures us there's a connection.

Bottom line, rising wages implying inflation and low unemployment suggesting a strong economy were more than enough to spook bonds on a day where payrolls were to be ignored.  It's a testament to bond market resilience (or perhaps to reports of a potential North Korean ICBM test) that rates were able to bounce in the afternoon.  Unfortunately, that bounce didn't heal the damage from this morning, but that could change if bonds open in similar territory on Tuesday (Monday is a holiday).