Weak Jobs Report Points to Economic Slowdown, Bonds Rally

By Rom Badilla, CFA – Bondsquawk.com

August 6, 2010

The U.S. economy may be losing steam on its road toward a recovery due to a drop in government workers and anemic increases in headcount in the private sector. According to
the Bureau of Labor Statistics, the Non-farm Payrolls index for June
decreased by 131,000 people. The decrease was well below surveys as
economists were expecting a decline of just 65,000. To add further
insult to injury, the previous month’s figure was revised downward from
an initial reported decrease of 125,000 to a staggering drop of
221,000. In the private sector, payrolls failed to meet expectations as
latest figures show an increase of only 71,000 jobs versus economists’
surveys of 90,000. In similar fashion to the total number, the June
numbers were revised downward by 52,000 to a final increase of 31,000.

In the lone bright spot from today’s data releases, the manufacturing sector added 36,000 people to the workforce in July versus surveys of 13,000. The prior period was
revised upward slightly to an addition of 13,000 as the initial report
for June stood at an increase of only 9,000. While this sector added
bodies to the workforce in July, the problem is manufacturing activity
is pointing south. Based off of recent data such as the drop in durable
goods orders and the latest ISM Manufacturing surveys, activity going
forward is slowing as inventory replenishment and federal stimulus
measures are about to wrap up.

Despite further job losses, the official Unemployment Rate remained the same in July, which is factored by a decline in the labor force as discouraged workers increased. The
Unemployment Rate came in at 9.5 percent in July as economists were
expecting a rate of 9.6 percent. The U-6 measure, which includes
workers who are discouraged as well as those who resort to working
part-time, failed to improve. The U-6 measure stands at 16.5 percent in
July, which has improved by only 1.1 percent since the high of 17.4
percent set in October 2009.

Bonds are rallying again because of the anemic jobs report. The 2-Year, acting true to its form as a gauge on the health of the economy, is past previous resistance levels and is now trading at 0.51 percent, a decline of 2 basis points from Thursday’s close. In addition, the
10-Year is now trading well below its most recent lows of 2.88 percent
set on July 21st, and has dropped 8 basis points to 2.82 percent.

Anyone who thought that the market was amidst a bond bubble and that yields could not go any lower before today must be kicking themselves at this point. As we have talked about for many months, the
U.S. is headed for an economic slowdown with the potential for another
double dip as people deal with a “balance sheet recession” where the
focus is on repair by “hunkering down” and less so of spending. Due to
these factors, disinflation/deflation will be the predominate theme
which in turn should lead to lower bond yields and better returns for
fixed income investors.