Strong Jobs Rattle Bond Investors
Submitted by Neville Associates on July 9th, 2019
Nonfarm payrolls rose 224,000, according to data released July 5. As shown in the LPL Chart of the Day, Strong June Payrolls Gain Surprises Investors, the rise in jobs last month handily beat estimates for a 160,000 gain.
The stronger-than-expected data caught bond investors off guard, though, as the 10-year Treasury yield posted its second-biggest increase on a jobs report day since the beginning of 2016. Markets were clearly prepped for a second month of disappointing jobs data, but there wasn’t much to critique in June’s report.
To be fair, jobs data have been unusually volatile this year. Payrolls have beaten or missed consensus estimates by an average of 81,000 jobs in 2019, compared to an average deviation of 49,000 jobs from consensus in 2018. May jobs data were unexpectedly weak on multiple fronts, convincing investors that trade tensions had finally infiltrated corporate hiring.
June’s strong jobs report also weakened the case for multiple rate cuts this year, dashing hopes of significantly looser monetary policy that recently have lifted stock and bond prices.
“Overall, we remain encouraged by the U.S. job market’s resiliency amid trade tensions,” said LPL Research Chief Investment Strategist John Lynch. “Strong labor market conditions have buoyed the expansion for 10 years, and continuing strength could overpower late-cycle cracks in smaller parts of the economy.”
Still, Basically, June’s strong payrolls gain was par for the course in this cycle. The U.S. economy has added jobs for 105 straight months, and it has been more than seven years since the change in payrolls was less than 100,000 for two consecutive months. U.S. companies have added 192,000 jobs per month on average over the last 12 months, above the 175,000 average jobs per month gain for the rest of this economic cycle.
As mentioned in our Midyear Outlook 2019, we think fundamentals support a 10-year yield higher than these levels. However, the uncertainty around trade, geopolitics, and global growth could limit the ability of yields to climb in the coming months.
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