- The January employment report was mixed but markets seem to be focusing on the uptick in the unemployment rate to 7.9% and have scaled back expectations on the first Fed funds rate hike.
- Job growth was the positive surprise, as there were significant upward revisions to 2012 employment and a large chunk of these showed up in the final quarter of the year.
- The key variable for timing the end of the Fed’s QE programme is job growth and today’s report does not change our view that QE will be scaled down this year.
The January employment report showed that the economy added 157,000 jobs last month, with the private sector adding 166,000 while the public sector shed 9,000 jobs. In the private sector, the goods-producing part added 36,000 jobs and the services sector added 130,000. Job growth in the services sector has lost a bit of momentum lately but this is countered by healthy gains in both construction and manufacturing employment. Given the strong ISM report also released this afternoon, we expect the manufacturing sector to continue to add jobs at the current pace.
Positive news came from the revisions to 2012, which amounted to a total of 335,000, with a large chunk of these in the final quarter of last year. Over the months from October to December, payrolls were revised up by 150,000, lifting average job growth over the past three months to 200,000. Hourly earnings lost some pace, rising 0.2% m/m but on a three-month average wage growth has recovered from a low point of 1% AR in October to 3% currently. Our payrolls income proxy suggests that labour income growth is currently running at a decent 5% AR.
Turning to the household survey, the unemployment rate ticked higher to 7.923%, up from 7.849%. The reason is a rise in the labour force of 143,000, while household employment rose only 17,000. Bear in mind that the employment data in the household survey is much more volatile than the establishment data. Over the past three months, household employment undershot the establishment data and we would not be surprised to see a reversal that brings the unemployment rate back to 7.8% next month.
Following the report, 10Y Treasuries rallied almost 10bp compared with before the announcement. 10Y Treasury yields have moved higher recently and were about to break into a higher range and the bar for breaking into that higher range was probably pretty high. Overall, we believe that today’s market reaction says more about positioning and the level of yields than about the perceived strength of the data.