Strong Jobs Report Pushes Treasury Yields Higher

Nov 02, 2018

The October Employment Report beat on the headline jobs growth number (250,000 vs. 200,000 expected), and the unemployment rate matched the cycle low of 3.7% from September, and matching the Fed’s year-end forecast. That’s putting pressure on short-end yields this morning as odds of continued quarterly rate hikes into 2019 increases.  Average hourly earnings  increased 0.2% as expected but off back-to-back 0.3% monthly gains.  The YoY rate rose to 3.1% which also matched forecasts with the 0.3% move higher from September attributable to a soft October 2017 print (2.3%) that rolled off the calculations. Despite much of the YoY gain being due to base effects it will nevertheless keep the Fed on track for a December rate hike, and odds of three hikes in 2019 are increasing on the back of the solid labor market read.  That will keep pressure on long-end yields via potential wage inflation. Presently, the 10-year is off 11/32nds to yield 3.17% and near the middle of the 3.10% -3.25% range that has prevailed since early October. The 2-year note is off 2/32nds to yield 2.89% and that’s likely to move towards 3.00% as pricing of future Fed rate hikes become more certain. With the employment report now out of the way, the market will soon turn its attention to the midterm elections next Tuesday so expect some volatility as that outcome gets assessed.


  Economic News


For the month of October 250,000 jobs were created easily beating the 200,000 jobs expected and well above the 118,000 jobs created in September (downwardly revised from 134,000).  Over the past year monthly job gains have averaged 211,000 so October’s results were even above that solid average. Private payrolls increased 246,000 versus 195,000 expected and 121,000 in September.  Despite the downward revision in September two-month revisions were unchanged from prior prints. Digging into the categories, 179,000 service-providing jobs were added during the month (72% of total job growth) versus 75,000 in September. Gains were led by health-care and social assistance (+47k) and leisure and hospitality (+42k). Professional and business services added 35k.  Meanwhile, 67,000 goods-producing jobs were added (28% of the total), which is up from the 46,000 added in September with manufacturing (+32k) and construction (+30k) leading the gains in that sector.


The most important metric in recent monthly jobs report have been the wage gain numbers and this month is no different. For October, wages matched both the monthly and year-over-year pre-release expectations. Average hourly earnings rose 0.2%. Year-over-year earnings rose 0.3% to 3.1% matching expectations and the highest YoY print April 2009.   While the YoY gain  is venturing into the 3.0% to 3.5% pre-recession rate, the 0.3% gain was due mostly to a low October 2017 print (2.3%) rolling off the calculation. The November report is likely to see the YoY gain move back to the high 2% level. In any event the continued monthly gains will embolden the Fed to continue with quarterly rate hikes.


After dipping two-tenths to 3.7% (3.683% to be exact) last month the unemployment rate remained at 3.7% (3.735%)matching expectations and matching September’s low print for this cycle despite the slight increase in the unrounded number.  The labor force increased a robust 711,000  which overcame an 111,000 increase in the ranks of the unemployed which  kept the unemployment rate unchanged.  The labor force increase is a positive development but the increase in unemployed is obviously less so and as such it provides a somewhat murky read on labor market slack given the conflicting signals.


The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) reversed its 1/10th increase last month and returned to 7.4% matching the cycle low print reached in August.  The rate drop was due to a decrease of 21,000 in part-time workers,  and a decrease of 86,000 in the ranks of the marginally attached (those willing to work but not actively looking). Helping those numerator decreases was the aforementioned 711,000 increase in the labor force denominator. This rate bottomed in the 7.9% - 8.2% range prior to the recession; thus, we remain in new territory with the present underemployment rate and that’s another indication we are operating at full employment and another hint the Fed is likely to keep to its quarterly hiking schedule for the foreseeable future.


The labor force participation rate (labor force divided by civilian population) rose to 62.9%  the 711,000 increase in the labor force was more than the 224,000 gain in the civilian population leading to the 2/10ths increase in the participation rate.  Despite the unrelenting gains in headline job growth, the current reading pales in comparison to the 66% level that prevailed pre-crisis but the 62.7% to 63.0% participation rate range of late may well be the new full employment normal given the low unemployment rates, aging of the working population and slowing overall population gains.


In summary, this is another solid jobs report with the 0.2% MoM and 3.1% YoY wage gains the lead story. The headline beat is another reason the Fed will find much to like in this report. The wage numbers alone will keep the Fed firmly in hiking mode despite the YoY gain that is due more to base effects and likely to revert back to high 2-handle for November. This report will keep the Fed firmly in hiking mode for December and likely firmly on its quarterly hiking schedule at least through the first half of 2019.




Market Update  Year-over-Year Change in Avg. Hourly Earnings


Average hourly earnings has become the most important metric in the monthly employment reports. With the unemployment rate dipping to cycle lows, and well below the Fed’s long-run equilibrium rate of 4.5%, wage gains rose 0.2% in October matching expectations but off the 0.3% September print. The October YoY print puts wage gains now in the 3.0%-3.5% pre-crisis range but still below the 50-year average of 4.2%. The October print, however, will embolden the Fed to remain on its quarterly hiking schedule for the foreseeable future. A Fed on the scent for wage inflation should help keep long-term yield increases in a reasonable range despite the knee-jerk back-up today.


Year-over-Year Change in Avg. Hourly Earnings



Agency Indications  Market Rates


Market Rates



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