Podcast: April 2010 Jobs Data

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

April’s payroll report helped renew confidence within the labor market as it grew for the third time in four months. There were 230,000 jobs created in April, including a positive revision of 68,000 to March’s data. The report is a positive sign, suggesting that the labor market is mending. April’s report beat market expectations with a broad-based increase. The manufacturing sector added 44,000 jobs, which was the largest increase since August 1998. Temporary help added 66,000 jobs, including some related to the 2010 census. I have previously noted the importance of separating growth in the public sector from growth in the private sector. With April’s report, we saw a positive shift to the private sector with an increase in the type of numbers the economy needs to see for sustainable growth.

Despite the job growth, the unemployment rate did move modestly higher to 9.9% from 9.7%. Although a negative number on the surface, it does reflect that more people re-entered the workforce which might mean that consumer sentiment is shifting to a more optimistic stance.

Risk was definitively re-priced on Thursday, one day prior to the release of the employment data. There was a global flight-to-quality bid in the Treasury market as investors flooded the sector, buying everything from Treasury bills to the long bond. Bills rallied back to levels not seen since the turn of the year, moving sharply from 12 basis points to 4 basis points. The move went in one direction and that direction was lower, as yields once again moved toward negative territory.

Concerns over Greece’s fiscal problem and the probability of contagion spreading to Spain and Portugal pushed the 30-year more than 5 points higher by early afternoon. The 10-year rallied by 15 basis points, to close on Thursday at 3.39%, before selling off to 3.47% prior to the release of the jobs data. We feel it was a pure panic trade and expect yields to move back in line with our predicted range of 3.75% to 4.25% for 2010 in the upcoming weeks. The labor data fueled the Treasury sector to initially sell off in price, moving higher in yield, before returning to the levels seen before the data was released. The front end remained anchored by Fed policy, moving higher in yield by only 4 basis points, placing the 2-year at 82 basis points. The 30-year underperformed the curve, selling off over 2 points, pushing the yield higher by 12 basis points to 4.28%.

There was a definitive shift occurring in the Treasury market as investors re-priced risk and sold spread products. Now investors are wondering if the move is temporary or if it has the potential to last. We believe the flight-to-quality trade is likely to continue until there is closure or, at the very least, some type of formal agreement enacted by the European Union. Trading is likely to remain volatile and at the lower end of the range in the near term. The battle between improving fundamentals and the ongoing fear of sovereign default will continue to weigh on investors. There will be a point in time when the desire to own Treasuries will fall, but we don’t expect that to happen anytime soon. We continue to feel that the front end of the yield curve will likely flatten, driven by Fed rhetoric and the unwinding of its stimulus measures, with the view that the Fed will remain on hold for the remainder of 2010.

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

SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).