Podcast: November 2009 Jobs Data

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

Better days ahead—or are they? I would like to be an optimist and believe that they are. November’s jobs data supported this view, showing signs that the labor market improved significantly, with the likelihood of a continuing trend. The nonfarm payroll number unexpectedly declined only 11,000, which was much better than expected. In addition, October’s payroll number was revised to show a decline of 111,000 compared to the initial reported decline of 190,000. The unemployment rate also ticked lower to 10%.

The pace of layoffs is slowing; however, companies are not at the point of hiring yet. Whether because of a lack of confidence in the economy, or uncertainty about future growth prospects, most companies are still some time away from adding employees. Although employment is moving in the right direction, as certain sectors of the labor market are adding jobs, the manufacturing and construction sectors continue to feel stress. The number of temporary workers increased by 52,000, growing for the fourth consecutive month. It was the largest increase since the fall of 2004 and points to the potential for future growth within the labor market. We hold the view that this positive news in temporary hiring will translate into job growth for the first quarter of 2010.

The Treasury market sold off immediately across the curve after the payroll data hit the tape, as it was much better than what the sector was pricing in. As investors digested the data, the curve flattened in a bearish fashion. The ten-year closed the day at 3.47%, and the two-year immediately sold off 9 basis points to close at 83 basis points.

The payroll data is a step in the right direction, but it is only one number. Investors need to remind themselves that the front end of the yield curve sometimes gets a little ahead of itself. More specifically, federal fund futures immediately started pricing in a higher probability of tightening than they had prior to the release. This type of move can be expected, but we look at this as a knee-jerk reaction. It is very common to see these types of moves revert to prior levels a week later, unless of course we continue to see a string of positive data.

The Treasury market will remain volatile in upcoming weeks as we approach year end. Economic data is likely to remain choppy, sending mixed signals to investors. The curve is likely to flatten as trends start to emerge, showing a sustainable recovery in both the economy and hopefully the labor market. The flattening trade will also be driven by Federal Reserve rhetoric and the unwinding of its stimulus measures. At this point in time, our expectations have not changed—we still believe the Fed will remain on hold at least until second half of 2010.

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

Thank you.