BondSquawk

By Rom Badilla, CFA – Bondsquawk.com

September 3, 2010

According to the U.S. Department of Labor, the private sector added jobs last month, curtailing concerns of a weakening economy and the prospects of falling into a recession. Private Payrolls for August increased by 67,000 people after the July estimate was revised upward by 36,000 to a final tally of 107,000 people. The August addition by U.S. companies surprised the market as forecasters expected an addition of only 40,000 people. BNP Paribas’ chief economist, Julia Coronado pointed out in a morning email to clients that “Most of the strength was in education and health care although temporary hiring picked up to 17k after a 1k decline and there continues to be modest hiring in leisure and hospitality. The slowing in private hiring came in manufacturing which let go 27k workers, mostly in the auto industry, after a 34k gain in July.”

For total changes in both the public and private sector, Non-Farm Payrolls fell by 54,000 in August versus consensus surveys of a drop of 105,000 people. The drop in the total number can be attributed to the 111,000 loss in government employment due to the conclusion of the Census as well as declines on a state and local level. In addition to the positive surprise, the prior period was revised upward to a decline of just 54,000 workers versus an initial estimated decline of 131,000 people.

After all that is said and done, improvements on the job front appear to be lackluster despite the positive surprise from market expectations. Coronado stated, “Looking at all hiring ex-census (including state and local govts) the underlying pace of hiring was 61k in August, down from 89k in July but above the 50k pace in June. This suggests that employment has been moving along steadily at a subpar pace over recent months.”

The household survey or otherwise known as the official Unemployment Rate deteriorated in August. The Unemployment Rate in August increased to 9.6 percent, which was in-line with surveys and a tenth of a percent higher than the prior month. In addition, the U-6 measure, which includes workers who are discouraged as well as those who resort to working part-time, deteriorated as well. The U-6 measure increased to 16.7 percent in August from 16.5 percent in the prior period.

Given today’s economic data releases, coupled with signs of some strength in manufacturing activity, namely the Institute for Supply Management survey, which continues to remain above a contractionary reading, the Federal Reserve should maintain a “wait-and-see” mode as it stands ready to move toward an accommodative stance. Coronado stated the following in light of today’s numbers:

“With just this data in hand it would seem that the economy continues to grow at a subpar pace, but is not deteriorating. This likely gives the Fed time to wait and see how things develop from here. They will maintain an easing bias owing to the expectations that the unemployment rate will rise at this pace, but will likely not be ready to pull the trigger on QE2 at the September FOMC meeting. Claims and other data will continue to be important and we maintain the expectation that they will ultimately engage in QE2 but it will be a decision that continues to be data dependent.”

Currently, the markets are reacting favorably to today’s report. Stocks are higher as the S&P 500 is up by 1.05 percent. The 10-Year yield is higher by 7 basis points to 2.69 percent. Interestingly, both the 2-Year and the Dollar is less impressed by the report.  The 2-Year yield is currently trading at 0.51 percent, up just 2 basis points from yesterday and 5 from the recent lows. In addition, the Dollar Index is down on the day by 0.5 percent to 82.053.