Podcast: October 2009 Jobs Data

Welcome, my name is Sean Simko. I am the Managing Director of SEI Global Fixed Income Management. Today’s commentary focuses on jobs data for the month of October, including the non-farm payroll number, and the market’s initial reaction.

After a modest rise in September, October’s non-farm payroll number showed some signs of improvement. However, improvement is in the eye of the beholder, as it is difficult to view a loss of this magnitude in a positive light. The report was not pretty, as the U.S. labor force continues to shed jobs. Non-farm payrolls showed a decline of 190,000 jobs, more than economists originally estimated. On a more positive note, there was a positive revision of 44,000 jobs to September’s non-farm payroll figure. A bright spot did develop in the temporary hires category, which is often viewed as a leading indicator; this area of the labor market created 34,000 jobs. Historically, once temporary hires turn positive, there is an average lag of three to six months before job creation resumes. Builders and the construction sector continued to cut jobs, eliminating 62,000 positions, a little less than the loss of 68,000 reported in September. Service industries shed 61,000 workers for the month, with retail cutting close to 40,000 positions.

Last month, when September’s unemployment rate hit the tape, market participants gasped at the 9.8% rate, but it was expected. Estimates for October were for a modest increase of 0.1% to a rate of 9.9%. Economists did not expect that the unemployment rate would move north of 10% until 2010.

On Friday, when October’s payroll data was released and the unemployment rate reached 10.2%, reality set in. This is a level not seen since April 1983, 26 years ago. It is clear that the labor market remains weak, and it is going to take some time to heal. Rising unemployment is a clear threat to economic recovery.

The Treasury market rallied across the curve, driven by the view that the Federal Reserve is likely to keep interest rates at the current 0-to-25-basis-point range longer than initially anticipated. Immediately after the release, the curve shifted lower in yield, reflecting disappointment from the larger-than-expected unemployment rate and the additional loss in jobs. As investors analyzed and digested the data, the long end reversed course, pushing yields higher. The 10-year closed the day at 3.50%, and the two-year closed at 0.84 %.

The Treasury market will remain volatile in upcoming months as we approach year end, since economic data continues to reward investors one day and disappoint on another. The curve is likely to steepen in the upcoming weeks before beginning to flatten. The flattening move is predicated on the Fed unwinding its stimulus measures and eventually raising rates. At this point in time, our expectation is for the Fed’s exit strategy to remain on hold, at least until the second half of 2010.

If you have any questions about this podcast or the financial markets, please contact your SEI representative. Thank you.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

SEI Investments Management Corporation acts as investment advisor for SEI Global Fixed Income Management. There are risks involved with investing, including loss of principal.